Review of the Year
Key Risks
UK Life and Pensions
Changes to the distribution landscape
We seek to build long-term relationships with distributors. We have secured places on many best advice and multi-tie panels with leading firms and innovative new entrants. We have attracted all types of distributors by delivering excellent service, products and technology. We monitor developments in the distribution sector and seek to position ourselves in an appropriate way that plays to these strengths.
Competitors develop more advanced IT solutions and service capability
Our operating platforms are highly regarded and our structure is designed for continuous development to be achieved. We aim to retain our reputation for service and technology and we monitor competitor activity carefully.
Changes in volume or profitability in key market segments or emergence of new markets
We monitor our relative product range and competitive position and analyse our experience of policy claims and lapses. We use this information to re-price our products or develop new ones, targeting those markets that we see as most likely to grow and to be profitable. For example, our recent strategic review has given us a focus on protection business and group pensions where no initial commission is paid.
Changes or volatility in UK and global economic factors
Changes in interest rates, house prices, earnings and price inflation and the availability of credit can all affect consumers' disposable income. We are not able to control the external economic environment but we monitor these factors and so we are able to adapt our approach to the market and our expense base to help us meet our targets and deliver on our commitments to our different stakeholders.
Implementation of our revised strategy
An experienced team, led by representatives of the most senior management, is implementing the revised strategy. Plans are being thoroughly assessed for risk and tested against a range of economic and investment scenarios to help ensure that the strategy is robust, well founded and capable of leading the refocused business forward. We are seeking to ensure our people are engaged with, and sympathetically led through, the implementation process and that key skills and experience are retained in this time of change and uncertainty.
Friends Provident International
Increased regulation materially impacts costs, capital requirements, distribution, regulatory responsibility or the market for products
The implementation of directives and other changes in regulation is monitored, seeking to identify opportunities and ensure timely, compliant and cost effective solutions. Detailed analyses of the impact on distribution relationships and product offerings are undertaken to determine the required changes in distribution and product strategies.
Reliance on key territories, products or distribution partners for business
Diversification across territories, business lines and distribution partners allows us to take advantage of opportunities to secure business volumes and profitability and respond to regulatory and/or legislative change and competitor activity.
Expansions into new territories do not produce the expected results
We plan our entry into any new territory by looking at the expected business volumes and mix, dealing with high-calibre/reputation partners, and considering the regulatory environment and requirements. Our emphasis is on business with strong margins supported by excellent customer service.
Availability of cash or capital restrict new business growth
The business is inherently more profitable than its UK parent company. For example, in 2007, its internal rate of return was 17.8% and cash payback was 6 years. New business strain is therefore more quickly recovered than in the UK. Management Information is in place to track and forecast cash consumption from new business. FPI's cash and capital needs can be met through its parent company and the business is confident that FPI's growth plans can be funded.
Financial strength of parent company
FPI's ability to gain regulatory and product licences in some territories is subject to the financial strength of its parent company, either in terms of credit rating or presence within the FTSE100 index of listed companies. The current credit and insurance financial strength ratings are considered sufficient to maintain the territorial licences we have obtained in recent years. Downgrades from the current levels could put pressure on FPI's ability to remain in some territories.
Lombard
Regulation and/or fiscal change materially impact costs, capital requirements, distribution, regulatory responsibility or the market for products
The implementation of directives and other legislative changes is monitored, seeking to identify opportunities and ensure timely, compliant and cost effective solutions. Detailed analyses of the impact on distribution relationships and product offerings are undertaken to determine the required changes in distribution and product strategies.
Reliance on key territories, products or distribution partners for business
Diversification across territories, business lines and distribution partners allows us to take advantage of opportunities to secure business volumes and profitability and respond to regulatory and/or fiscal change and competitor activity.
Expansions into new territories do not produce the expected results
We plan our entry into any new territory by looking at the expected business volumes and mix, dealing with high-calibre/reputation distribution partners, and considering the regulatory environment and requirements. Our emphasis is on business with strong margins supported by excellent customer service.
Mismatch of solutions and client expectations leads to poor persistency, complaints or damage to reputation
Due diligence on distribution partner firms helps ensure that business is written through financially sound and appropriately authorised and competent firms. Our strategy is to distribute through independent intermediaries who are authorised in their respective markets, but where introducers or agents are used there are clear agreements on the scope of their activities, and appropriate training and support programmes are developed.
Review of corporate strategy
The Friends Provident Board has announced that it is looking to identify the appropriate strategy to maximise value for its shareholders while working closely with the management of Lombard to preserve its independence and unique business model. This can be achieved through a range of strategies and the Board does not intend to rush into a disorderly process that damages the stability of the business. The Board is however aware of the need to achieve stability and certainty as quickly as possible and to ensure that key skills and experience are retained in the meantime.
F&C Asset Management
Operational platforms
During 2007, investment administration services previously outsourced to Mellon were brought back in-house and merged into one Investment Operations department. This has allowed for greater management oversight and enhancement of the control environment. Throughout 2008, a major programme is underway to consolidate the systems and processes on to a single platform and operating model.
Front office control processes
During 2007 significant progress has been made in relation to the development and implementation of the new front office systems, which has addressed the risk of having multiple legacy platforms. An integrated systems platform is now in place for dealing and order management and decision support for equity fund managers. Equivalent systems for fixed income and pre and post-trade compliance will be implemented in the first half of 2008. In addition, a core risk platform was implemented for use by both the front office and Investment Risk functions replacing multiple legacy risk services.
Market trends towards polarisation and fiduciary management
The trend, particularly in The Netherlands, towards Fiduciary Management presents a business risk for the balanced institutional mandates managed by F&C but has also opened up some new opportunities. F&C's own Fiduciary Services offering has already been launched for clients in The Netherlands. Throughout 2008 there will be increasing focus on product development and distribution.
Risk of poor historical investment performance leading to loss of key investment mandates
Despite difficult market conditions in the second half of 2007, there was an improvement in investment performance throughout the year with some notable areas of out-performance. In 2008 there will be continued focus on performance and the retention of key talent.
Uncertainty and distraction arising from Friends Provident's strategic intentions for F&C
Friends Provident's January 2008 announcement creates a risk of disruption to asset gathering and the stability of F&C's human capital. The F&C Board is working with the Board of Friends Provident to find a solution that is in the best interests of all shareholders and are proposing amendments to F&C's remuneration plans to enhance retention value.