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Financial Conduct Authority 

  • Stuart Fowler

With-profits for the Sandler Suite: no way

Malcolm Berryman, Chief Executive of Liverpool Victoria, makes a plea in the FT today for including with-profits in the ‘Sandler Suite’ of products that can be sold to the public with lighter regulation (because their simplicity, clarity and low cost greatly reduce the risks the customer will buy a pig in a poke). In seeking to differentiate Liverpool & Victoria from other with-profits providers who have much lower reserves and very little equity-backing (quite fairly), he makes the strongest case of all against a with-profits fund: the customer’s selection risk needs to be diversified.

A necessary condition of the Sandler product concept is that the risk in selecting one or other provider does not need diversifying. Sandler’s concept is of a true commodity product, where there is no agency risk and customers are essentially indifferent to owning one of a type instead of several. Funds that track the systematic return of an asset class and are structured as ‘bear trusts’, with no exposure to the financial distress of the provider, are commodity products. Diversification by provider is not necessary.

With-profits are the very opposite: the exposure to the financial strength of the provider operates at many levels, all in an unpredictable way: asset mix, enforceability of guarantees, active-management risk and the impact of marketing and operating costs on policyholder returns. If you’re not sure about the requirement to diversify these risks, ask anyone who was entirely dependent on Equitable Life’s with-profits contracts.

There are many other necessary conditions for lightly regulated products, covered in the topic index under ‘with-profits’, ‘low-risk products’ and ‘regulation’. With-profits also fails these.