Life Offices (Hansard, 26 July 1989)

§ Mr. Redwood

We have recently considered whether any regulatory issues arise from the operation of "broker funds", defined as "Any arrangement under which a broker (or a nominee of the broker) has rights, not available to individual policyholders, to advise or decide on matters which determine the benefits under policies issued by the life insurance company through the broker.

We have consulted the Securities and Investments Board and other relevant self-regulating organisations. The Securities and Investments Board is today issuing a consultation paper on the marketing and competence issues involving broker funds.

We have concluded that the operation of broker funds may in the past have exhibited some potential for unfairness although we have no firm evidence that there was any unfairness.

Consequently the Department has today written to life offices and other relevant organisations providing guidance to life offices and their auditors on the regulatory position as it affects broker funds, and on certain other issues to which they should have regard in the appointment of brokers to manage funds and in the operation of those funds. I have arranged for a copy of the text of the letter to be placed in the Library of the House. The letter emphasises the importance of section 31A of the Insurance Companies Act 1982. This section requires insurance companies to ensure that adequate arrangements are in force for securing that transactions affecting assets of the company (other than transactions outside its control) do not operate unfairly between different funds of the company. In the Department's view any transaction between funds which is effected in the knowledge that it will, or is likely to, cause detriment to one of the funds must "operate unfairly". While section 31A is already in force we are considering introducing a new regulation later this year requiring companies to report on their arrangements to meet the duty imposed by the section. This regulation—which is the subject of separate consultation with the industry—would require a certificate to be signed by the directors, to be annexed to the annual report, which would state that for the past financial year the company has had in force arrangements to meet this duty. This certificate would be subject to audit. We have 713W considered the implications of section 31A for the operation of intermediaries funds, and in particular for the granting of rights to brokers which are not conferred on policyholders generally and detailed guidance is provided in the letter to assist insurance companies to comply with the section. Further, we consider that insurance companies should satisfy themselves as to the competence of any broker or nominee managing any of its funds and to monitor their performance on a regular basis. At all times companies should maintain tight controls on broker fund operations.