Prudential Regulation Authority Rulebook

3.1

Firms sometimes seek to provide support to a with-profits fund from financial resources outside that fund. These support arrangements can take a variety of forms and are intended for use in a wide range of different circumstances. Where such support arrangements are intended to provide benefit security for policyholders, the PRA will need to consider, in the light of the terms governing their use and other relevant factors, whether they achieve their purpose. In particular, the PRA will expect firms to be able to justify their use of these arrangements, where the financial resources to which they relate may also be intended to support other areas of the firm’s business.

3.2

The PRA expects Solvency II firms to consider whether any support arrangements that exist in relation to a with-profits fund also fall within the Solvency II RFF requirements, having regard to the terms and conditions of those arrangements. In particular, firms should take into account the extent of any restrictions on a firm’s use of assets associated with support arrangements, and the expected availability of such assets in stressed conditions.

3.3

Where the terms and conditions of a support arrangement state clearly that the support is for the exclusive use of a with-profits fund, the PRA expects that one or more or the ring- fencing criteria set out in the Solvency II Regulations will be met, and that any assets associated with such a support arrangement will form part of the RFF constituted by the with- profits fund receiving support. The PRA considers support for a with-profits fund to be ‘exclusive’ if under the terms of the arrangement it cannot be used to meet losses arising in other areas of the business.

3.4

Where support is not for the exclusive use of a with-profits fund, the PRA expects that assets associated with support arrangements should not generally form part of the Solvency II RFF constituted by the with-profits fund receiving support. In this case, the expectations of the PRA in respect of those arrangements are as follows:

(a) The extent to which the PRA will permit a Solvency II firm to recognise and use such support assets as part of the financial resources available to meet the liabilities of the with-profits fund will depend on the PRA’s view of the financial strength of the overall firm, including the parts of the firm which are subject to the RFF regime and those which are not. The PRA’s view will be based on an assessment of the risks involved, the degree of reliance placed on such support, and may include consideration of factors outside a with-profits fund which could have a negative or detrimental impact on the financial strength of the firm, including the ability of the arrangement to support the with-profits fund in periods of stress.

(b) In certain circumstances the PRA might expect a Solvency II firm to recognise a with-profits support arrangement as providing exclusive support to a with-profits fund. In those cases, the PRA might expect a firm to identify specific support assets and to include them within the RFF constituted by the with-profits fund receiving support, in advance of it drawing upon a support arrangement, and any transfer of assets from outside to inside the with-profits fund associated with such an action.