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Select Committee on Treasury Twelfth Report

5 Reattribution

Introduction

70. Chapter 2 introduced the concept of a reattribution as a transaction in which the with-profits policyholders of a firm are offered a one-off payment by the firm, in exchange for giving up their contingent rights to participate in possible future distributions from their funds' inherited estate.[145] The decision whether to accept the offer is not based on a majority vote: each individual policyholder makes a choice based on their own circumstances.[146] Those who reject the offer retain their interest in the fund and are not allowed to be disadvantaged by the reattribution process.[147] The fund itself retains its entire inherited estate, as the payment to policyholders is made out of separate shareholder funds.[148] There are several stages in the approval process of a reattribution scheme: shareholders, then the FSA and then individual policyholders. Subsequent to policyholders making their choice, the entire reattribution scheme is put forward to the High Court for final sanction.[149]

71. Mr Hodges said there were benefits for both shareholders and policyholders in a reattribution:

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Norwich Union described the decision to proceed with a reattribution as a commercial and economic decision. From the shareholder perspective the question to be asked was whether a reattribution would be the best use of scarce resources vis-à-vis other investment opportunities. For policyholders the question was whether reattribution represented a better deal than waiting for potential distributions on a 90:10 basis in the future.[151]

72. Mr Sants said that, in a 90:10 fund, the 90:10 ratio was the "starting point" for reattribution negotiations, but not necessarily the end point. The FSA's judgement was that if the FSA only permitted reattribution offers that were equivalent to 90% of the value of the inherited estate, such reattributions "would not take place".[152] Norwich Union gave two reasons why it was "not economic" for the firm to make such an offer to policyholders:

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Ms Spottiswoode acknowledged that there were risks that the company would take on following a reattribution, so that it would be legitimate for a firm to offer policyholders a sum less than 90% of the value of the inherited estate.[154]

Intergenerational transfers

73. Chapter 3 discussed how the setting aside of capital from the inherited estate for the acquisition of new business to the fund represented an intergenerational transfer from current policyholders to future policyholders, or in the case of a reattribution, future shareholders. Ms Spottiswoode had sought specific guidance from the FSA regarding the question of how this transfer should be treated in a reattribution. The FSA's subsequent guidance accepted that this tranche of capital did have a value attached to it and so should be included in the negotiated payment made by the shareholder.[155] Mr Sants similarly confirmed that, in negotiating with the firm, Ms Spottiswoode should take into account the value shareholders would unlock from the whole of the inherited estate, rather than just the value of potential special distributions foregone by existing policyholders in the reattribution.[156] If such value is reflected in a reattribution payment offered to policyholders, then policyholders would stand to receive a sum greater than the benefits they might reasonably expect from special distributions. Obtaining such a payment might prove difficult for policyholders though, because a life firm undertaking a reattribution would know that most policyholders would be willing to accept just enough to compensate them for their likely foregone distributions. Mr Bill Knight, one of Ms Spottiswoode's expert advisers, explained that a policyholder advocate could find themselves having to conclude that a firm's reattribution offer was in the interests of a significant percentage of policyholders, but overall was at a level that was unfairly beneficial to the firm. In those circumstances it would be difficult for a policyholder advocate to oppose the scheme.[157] Ms Spottiswoode recognised that this situation was a real possibility:

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Miss Spottiswoode said that it fell to the FSA to ensure that they watched the fairness criterion because she could not: "all I can do is comment on it, I cannot change it. I do hope the FSA will do that properly".[159]

74. The Financial Services Authority has made clear that parties to a reattribution negotiation should consider not just the value of potential special distributions to current policyholders, but also the total value that the firm's shareholders stand to gain from the transaction. The bargaining power of the policyholder, however, is limited to the former consideration, because a firm undergoing a reattribution would know that most policyholders would accept any offer that provided adequate compensation for the foregone chance of benefiting from future distributions. If a firm decides to tell policyholders not to expect any special distributions at all whilst they remain policyholders, that bargaining power is weakened further, to such an extent that most policyholders would accept even a derisory offer. Given, this weak bargaining position, the Financial Services Authority has a crucial role to play in a reattribution. The Financial Services Authority must ensure that, when the firm concerned frames its offer to policyholders, a fair value has been assigned to the gains accruing to shareholders in the transaction. In these circumstances, it is incumbent upon the FSA to ensure that a fair price is offered, not just an adequate price. They are two quite different things.

Policyholder advocate's role

75. The FSA introduced the role of policyholder advocate to represent the interests of policyholders who were eligible to participate in reattributions of with-profits funds. Ms Spottiswoode was appointed Norwich Union's policyholder advocate in November 2006, and she has since established a team of advisers, including legal, economic, actuarial, tax, communications and other experts to assist her.[160] She said that her "absolutely key role is to represent policyholders in this really complex transaction" and that, if the reattribution negotiations resulted in an offer being made to policyholders, her role would entail explaining to policyholders what the deal meant, putting it in context and trying to ensure that each individual policyholder was given the information required by him or her to make a personal decision as to whether or not to accept. She also saw her role as explaining context, "and some of that will be around how much is it that the policyholders are being charged, in effect, for the way in which the FSA regulates these estates". Finally, she said her role was about transparency:

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76. One area in which Ms Spottiswoode thought her role could be improved was communication with policyholders. She wanted to be able to perform more direct communication, if "done with care and good judgment". She commented that better communication was important because most policyholders were quite distant from the issues involved in a reattribution and that a reattribution was very complicated.[162] The Policyholders' Action Group agreed that there had been inadequate communication from Ms Spottiswoode:

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77. The Policyholders' Action Group were also very critical of the lack of powers of a policyholder advocate, characterising the role as "The Muggers' Advocate":

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78. Ms Spottiswoode explained that Norwich Union had been responsible for providing her with the resources she required, including paying salary costs of her and her team.[165] She added that she had been "very pleased" with the provision of resources, and she thought that, despite receiving a salary from Norwich Union, it was "clear that I am independent".[166] Mr Lindley argued that the appointment of a policyholder advocate should not be made by the firm concerned, but by "some other institution". Although he did not doubt Ms Spottiswoode's independence, he was concerned that another firm would be able to appoint a weak policyholder advocate if they so wished.[167]

79. We welcome the advent of the role of policyholder advocate, to negotiate on behalf of policyholders in a reattribution negotiation. One specific power we wish to see future policyholder advocates armed with would be the ability to communicate with policyholders whenever they wished to. The Financial Services Authority should stipulate that policyholder advocates' contracts and terms of reference allow such communication.

Role of the FSA in a reattribution

80. Once a policyholder advocate and a firm completed their reattribution negotiations, the FSA considers whether the overall proposals are fair to policyholders. In doing so, the FSA must take into account the interests of all policyholders, including the relevant with-profits policyholders, and the implications of the proposals for the financial position of the firm. Information considered by the FSA in forming their view comes from the firm itself, the firms' with-profits actuary, the independent expert or reattribution expert (who is required to undertake an objective assessment of the proposals and to report on this) and the policyholder advocate. The FSA asks the firm to demonstrate that the proposals are fair and that they are consistent with all other relevant FSA requirements.[168]

81. As discussed in Chapter 4, in a reattribution of a 90:10 fund, the FSA's assessment of fairness starts with the principle that the basis of distributions to policyholders and shareholders will be in the proportions of 90% and 10% respectively. If the reattribution proposal is to divide value between policyholders and shareholders on a basis that is different from this 90:10 starting point, the FSA looks at the basis for that proposed division and decides whether it is fair.[169] The FSA also considers the offer's fairness to policyholders vis-à-vis the overall benefit to the shareholders.[170] This fairness assessment is made before the reattribution proposals are put to policyholders by the firm. If the FSA concludes that the proposals are unfair to policyholders, it would "take steps to prevent the firm from putting the deal to policyholders".[171] Where the firm and policyholder advocate agree that a reattribution deal should be put to policyholders, the reattribution scheme is presented to the High Court. The High Court's role in a reattribution is to give final approval to the scheme.[172] The FSA's assessment of fairness would form part of its submission to the High Court and so would be made public at this point.[173]

82. In oral evidence, Mr Sants explained the FSA's role:

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Speed of negotiations

83. Norwich Union proposed a reattribution of its CGNU and CULAC funds in November 2006, and negotiations are still ongoing. Ms Spottiswoode explained that there were two reasons, running in tandem, for the process taking so long: problems with the data, and the need to seek clarification from the FSA about policyholders' rights. She explained that:

It took until December to get the data and the modelling to a position that we could all have confidence in. We thought we were there a lot earlier, but actually we found very big mistakes in the data because we had our own model. We were running different data and we were trying to work out why our data was showing different things and again and again we found really big problems in the Norwich Union models and their data. A lot of time has been spent having to sort out that. It was not until December that both Norwich Union and we felt we had data that we could rely on for this deal.[

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Mr Hodges agreed that the Norwich Union reattribution negotiation had been a very complex issue, saying that there had been an "enormous amount of information" flowing between Norwich Union and Ms Spottiswoode's office.[176] Mr Hodges also referred to data issues which had prolonged the negotiations:

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84. Ms Spottiswoode also explained that at various stages in the negotiations, she had had to seek clarification from the FSA about the rights of policyholders. The seeking of clarification had run in tandem with the data problems:

Alongside that, clearly we have been trying to clarify what policyholders' rights are and that has taken time. In some senses the two were going along in parallel and neither stopped the other because they both come together at the same time.

She said that a reattribution "is a long process because it is complicated and detailed" and that policyholders should not be surprised if it took a long time. She admitted to her frustration that it had not been done faster, but said "you have to do the job right. This is too important not to do right."[178]

85. Norwich Union made the following suggestions for improving the negotiation process for future reattributions:

A timetable must be agreed and stuck to by both parties to avoid negotiations becoming open ended and unnecessarily protracted.
The FSA must be able to intercede and act as a final arbiter on points of dispute.
Firms must be free to set rigorous terms of reference.[179]

Ms Spottiswoode disagreed with the idea of having a fixed timetable for the negotiations. She argued that if negotiations had had to proceed based on the data as it was in August 2007, those negotiations would have resulted in a deal that would have been "very, very substantially wrong, by many hundreds of millions". Taking time to make sure that the data and modelling was accurate was an essential element of fair negotiations.[180] Mr Sants thought that there would be "some lessons to be learned about data availability and issues around that which the companies will have to take on board" from the experience of the Norwich Union reattribution, and suggested that the FSA would "try to facilitate a lessons learned exercise".[181]

86. Given the complexities involved in with-profits funds, and the widely differing views from various stakeholders about what might constitute a fair offer to policyholders, reattribution negotiations may be expected to take a long time. We do not believe that the Financial Services Authority should impose a rigid timetable for any future reattributions, or permit companies to do so, because the most important outcome is that an appropriate offer should be made.

145 Ev 56 Back

146 Q 49 Back

147 Qq 80, 218 Back

148 Qq 173-174 Back

149 Q 218 Back

150 Q 175 Back

151 Ev 82 Back

152 Q 93 Back

153 Ev 82 Back

154 Q 50 Back

155 Letter from Sir Callum McCarthy to Clare Spottiswoode, 1 February 2008, available at www.fsa.gov.uk Back

156 Ev 58 Back