The Friendly Societies (Insurance Business) Regulations 1994

Unlisted securities (other than derivative contracts) in aggregate up to a maximum of 10 per cent. of the property linked benefits.

3

Land (including any interest in land) in an EEA State, Australia, Canada, the Channel Islands, Gibraltar, Hong Kong, the Isle of Man, New Zealand, the Republic of South Africa, Singapore and the United States of America.

4

Loans—

• (a) which are fully secured by mortgage (or in Scotland, by standard security) or charge on land (or any interest in land) which—

• (i) is situated in any of the countries specified in paragraph 3 above; and

• (ii) in the case of a loan made to a person other than a body corporate, is not used wholly or mainly for domestic purposes, and

• (b) of which the rate of interest and the due dates for the payment of interest and the repayment of principal can be fully ascertained from the terms of any agreement relating to the loan.

5

Units in—

• (a) a unit trust scheme falling within Council Directive 85/611/EEC of 20 December 1985 on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investments in transferable securities[^f00023];

• (b) an authorised unit trust scheme other than an authorised unit trust scheme falling within subparagraph (a) above;

• (c) a recognised scheme within the meaning of sections 86, 87, and 88 of the Financial Services Act 1986[^f00024] other than recognised schemes falling within subparagraph (a) above.

6

Approved securities.

7

Loans to or deposits with an approved credit institution, an approved financial institution or an approved investment firm.

8

Income due or to become due in respect of property of any of the descriptions specified in the foregoing paragraphs of this Schedule.

9

Permitted derivative contracts.

10

Cash.

11

Units, by whatever name called, in a real or notional fund (not being a scheme or undertaking of a kind mentioned in paragraph 5 above) which is limited to the descriptions of property mentioned above and which under the contract is to be managed either—

• (a) wholly by the society; or

• (b) wholly or to any extent by another person being a person for whose acts and omissions in managing the fund the society assumes responsibility towards the policyholder as if they were the acts or omissions of the society, and otherwise (if at all) by the society.

PART II — INDICES BY REFERENCE TO WHICH BENEFITS MAY BE DETERMINED

12

An approved index.

PART III

13

Unless the context otherwise requires, words or expressions contained in this Schedule bear the same meaning as in Part IV of these Regulations.

14

For the purposes of this Schedule, “approved index” means either—

• (a) an index which is—

• (i) calculated independently;

• (ii) published at least once every week;

• (iii) based on constituents, each of which is property falling within paragraphs 1 to 8 or 10 above; and

• (iv) calculated on a basis which is made available to the public and which includes both the rules for including and excluding constituents and the rules for valuation which must use an arithmetic average of the value of the constituents; or

• (b) an index in respect of which a derivative contract is listed.

15

• (1) For the purposes of this Schedule, “permitted derivative contract” means a derivative contract to which subparagraph (2) below applies—

• (a) which is held for the purposes of reduction of investment risks or efficient portfolio management, and which—

• (i) is held in connection with property falling within paragraphs 1 to 8 or 10 above for such purposes; or

• (ii) has the equivalent effect to such a contract held in connection with such assets for such purposes;

• (b) in respect of which, having regard to its assets and liabilities, the society will have, so far as can reasonably be foreseen, and in the appropriate fund maintained by it, assets at the settlement date which match its obligations under that contract and from which it will fulfil those obligations; and

• (c) which—

• (i) is listed; or

• (ii) the society has entered into with an approved counterparty and which it reasonably believes may be readily closed out by entering into a further permitted derivative contract with an approved counterparty.

• (2) This subparagraph applies to a contract entered into by a society to which section 37(2) or (3) of the 1992 Act applies and which is—

• (a) a contract for differences under which the amount payable by either party is calculated by reference to fluctuations in the value of any property falling within paragraphs 1 to 10 of Part I above or in an approved index; or

• (b) a futures contract or option, in each case providing for the acquisition or disposal of property, all of which is property falling within paragraphs 1 to 10 of Part I above.

16

Benefits payable under any contract to which regulation 51 applies shall not be determined by reference to—

• (a) property of any of the descriptions specified in paragraph 2, 5(b), 5(c) or 7 above if the value of such property is determined, either wholly or partly, by reference to the value of, or the income from, fluctuations in the value of property other than property of the descriptions in Part I of this Schedule;

• (b) property of the description in paragraph 2 above unless the securities are realisable in the short term without any diminution in value.

SCHEDULE 7 — STATUTORY NOTICE

SCHEDULE 8 — NOTICE OF CANCELLATION

NOTICE OF CANCELLATION

Signed

In witness whereof the common seal of the Friendly Societies Commission is hereunto fixed, and is authenticated by me, a person authorised under paragraph 13 of Schedule 1 to the Friendly Societies Act 1992, on 18th July 1994.

Michael Cook — Secretary to the Commission

We consent to regulations 1-11, 19-51 and 60-63(1).

Tim Wood — Irvine Patnick — Two of the Lords Commissioners of Her Majesty’s Treasury — 20th July 1994

Explanatory note

(This note is not part of the Regulations)

These Regulations revoke the Friendly Societies (Insurance Business No. 2) Regulations 1993 (S.I. 1993/2520) and regulations 8 to 13 of the Friendly Societies (Amendment) Regulations 1993 (S.I. 1993/2519) and re-enact those provisions with modifications. The Regulations apply to both incorporated and registered friendly societies and come into force on 1st September 1994.

The Regulations implement the relevant provisions of—

• (a) the First Life Directive (that is, Council Directive 79/267/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct life assurance (O.J. No. L63, 13.3.79, p.1));

• (b) the First Non-Life Directive (that is, Council Directive 73/239/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct insurance other than life assurance (O.J. No. L228, 16.8.73, p.3));

• (c) the Second Life Directive (that is, Council Directive 90/619/EEC on the co-ordination of laws, regulations and administrative provisions relating to direct life assurance, laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 79/267/EEC (O.J. No. L330, 29.11.90, p.50));

• (d) the Second Non-Life Directive (that is, Council Directive 88/357/EEC on the co-ordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 73/239/EEC (O.J. No. L172, 4.7.88, p.1));

• (e) the Third Life Directive (that is, Council Directive 92/96/EEC on the co-ordination of laws, regulations and administrative provisions relating to direct life assurance and amending Directives 79/267/EEC and 90/619/EEC (O.J. No. L360, 9.12.92, p.1));

• (f) the Third Non-Life Directive (that is, Council Directive 92/49/EEC on the co-ordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (O.J. No. L228, 11.8.92, p.1)); and

• (g) the Agreement on the European Economic Area signed at Oporto on 2nd May 1992 (O.J. No. L1, 3.1.94, p.3) as adjusted by the Protocol signed at Brussels on 17th March 1992 (O.J. No. L1, 3.1.94, p.572).

The Regulations are divided into eight Parts: Part I contains the usual preliminary provisions as to citation and interpretation; Part II deals with margins of solvency; Part III deals with matching and localisation; Parts IV and V set out the rules to be applied in valuing assets and determining liabilities; Part VI makes special provision for long term business; Part VII deals with the provision of statistical information in relation to insurance business carried on or provided outside the United Kingdom; and Part VIII contains final provisions of a miscellaneous nature.

Part I is largely self-explanatory. Regulation 1 provides that the Regulations come into force on 1st September 1994.

In Part II, regulation 4 deals with the margins of solvency to be maintained by friendly societies. Regulation 4 is made under section 48 of the Friendly Societies Act 1992 (“the 1992 Act”), which provides for the amount of the margin to be prescribed by regulations. The margin for the various classes of long term business is to be determined in accordance with the detailed rules in Schedule 1. The margin for general business is the higher of the results given by the methods of calculation set out in Schedules 2 and 3 respectively. Regulation 5, which is made under section 49 of the 1992 Act, sets out the minimum level of the margin of solvency. Regulation 5 refers to that level as the “guarantee fund” which is defined as one-third of the required margin of solvency subject, in the case of a registered friendly society to which section 37(2) or (3) of the 1992 Act applies or an incorporated friendly society, to a minimum amount referred to as the “minimum guarantee fund”. The minimum guarantee fund is arrived at in accordance with regulation 6 with respect to long term business and regulation 7 for general business. The guarantee fund therefore cannot be quantified until the required margin of solvency has been calculated. If the margin of solvency falls below the guarantee fund, the Commission may request the society concerned to submit a short-term financial scheme to restore the position (section 49 of the 1992 Act). Regulation 5(3) limits the extent to which implicit items may be taken into account in the composition of the guarantee fund and minimum guarantee fund for long term business. Implicit items are future surpluses, zillmerising and hidden reserves, as provided in regulations 8-11 which are valuation regulations made under section 45 of the 1992 Act. The minimum guarantee fund is expressed as an amount in ECU. The term “ECU” is defined in section 119(2) of the 1992 Act which states that the exchange rates as between the ECU and pounds sterling to be applied for each year beginning on 31st December shall be the rates applicable on the last day of the preceding October for which exchange rates for the currencies of all the member States were published in the Official Journal of the Communities. Information on the appropriate exchange rate is available from the Friendly Societies Commission.

Regulations 12 to 18 in Part III are necessary to implement the above mentioned directives as regards matching and localisation. Matching means holding assets in a currency appropriate to the society’s liabilities, and localisation means holding those assets in the location appropriate to them. Regulations 12 to 18 apply only to friendly societies to which section 37(2) or (3) of the 1992 Act applies.

Parts IV and V are valuation regulations made under section 45 of the 1992 Act. They are essentially adaptations of Parts VIII and IX of the Insurance Companies Regulations 1994. Part IV is intended to ensure a satisfactory spread of assets by requiring that any asset, the valuation of which is not provided for in the Regulations, is to be left out of account altogether. Furthermore, assets of a description specified in Schedule 5 (other than the assets of a registered friendly society to which neither section 37(2) nor (3) of the 1992 Act applies) may be taken into account only within the limits specified in that Schedule. Regulations 21 and 22 make provision for valuation of shares in and debts due from dependants of societies. Dependants are defined as subsidiaries of, or bodies jointly controlled by, a friendly society within the meaning of section 13 of the 1992 Act. Consequently no registered friendly society is capable of having a dependant for the purposes of these Regulations.

In Part VI, regulation 51 makes provision for all long term linked contracts entered into by friendly societies (including those entered into prior to the coming into force of these Regulations) other than contracts expressly excluded by regulation 51(4) and is made under section 56 of the 1992 Act. Regulation 52 sets out the contents and form of the statutory notice and notice of cancellation which friendly societies to which section 37(2) of the 1992 Act applies are required, under section 67B of that Act, to send to members who have entered into certain contracts of long term insurance (other than contracts the effecting of which constitutes investment business under the Financial Services Act 1986).

Part VII provides for the preparation and submission of statistical information in relation to insurance business carried on or insurance provided in other EEA States by friendly societies to which section 37(2) or (3) of the 1992 Act applies.

Part VIII contains miscellaneous provisions. Regulation 60 (in conjunction with section 46(1)(a) of the 1992 Act) ensures that any society which carries on long term business and is—

• (a) an incorporated friendly society, or

• (b) a registered friendly society to which section 37(2) of the 1992 Act applies,

is required to carry out an annual actuarial investigation into its financial condition. Regulation 61 prescribes the persons required to sign one copy of the abstract of the actuary’s report for the purposes of section 46(3) of the 1992 Act. Regulation 62 contains a transitional measure designed to ensure that an authorised registered friendly society (other than a society to which section 37(2) or (3) of the 1992 Act applies) is not under a duty to maintain a solvency margin under section 48 of that Act until the “first investigation return date” which is defined in regulation 62(2). Regulation 63 revokes the Friendly Societies (Insurance Business No. 2) Regulations 1993 and regulations 8 to 13 of the Friendly Societies (Amendment) Regulations 1993.

A review of the cost of compliance with these Regulations has been undertaken and the resulting compliance cost assessment may be purchased from the Secretary, Friendly Societies Commission, 15 Great Marlborough Street, London W1V 2AX.

Footnotes

[^f00001]: 1972 c. 68.

[^f00002]: The European Communities (Designation) (No. 5) Order 1992 (S.I. 1992/3197).

[^f00003]: 1992 c. 40; section 119(1) contains a definition of "the Commission".

[^f00004]: 1982 c. 50.

[^f00005]: S.I. 1987/2132.

[^f00006]: S.I. 1994/1516.

[^f00007]: 1986 c. 60.

[^f00008]: O.J. No. L386, 31.12.89, p.1.

[^f00009]: O.J. No. L141, 11.6.93, p.27.

[^f00010]: O.J. No. L386, 30.12.89, p.14.

[^f00011]: 1986 c. 53.

[^f00012]: 1986 c. 60.

[^f00013]: 1965 c. 12.

[^f00014]: 1969 c. 24 (N.I.).

[^f00015]: 1986 c. 60.

[^f00016]: O.J. No. L141, 11.6.93, p.27.

[^f00017]: O.J. No. L386, 30.12.89, p.14.

[^f00018]: 1986 c. 60.

[^f00019]: S.I. 1994/1983.

[^f00020]: S.I. 1993/2520.

[^f00021]: S.I. 1993/2519.

[^f00022]: O.J. No. L375, 31.12.85, p.3. Directive last amended by Directive 88/220/EEC (O.J. No. L100, 19.4.88, p.31.)

[^f00023]: O.J. No. L375, 31.12.85, p.3; Directive last amended by Directive 88/220/EEC (O.J. No. L100, 19.4.88, p.31).

[^f00024]: 1986 c. 60.