Operational rather than group level of AKG assessment
From the customer perspective, the financial strength of companies needs to be focused at an operational level, specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer’s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers’ advisers must be met.
AKG therefore adopts this level of focus on operational capability and does not seek to rate group / holding companies. Our assessment falls at a lower corporate level than typically considered in other types of rating, although consideration of such group and parental aspects remain very important contextual criteria.
This contrasts to credit rating, which will be undertaken at group or parent company level where investment or debt placement etc. is made. This is perfectly reasonable for credit rating, but it is unreasonable and inappropriate for customer-oriented assessment.
With Profits
A similar focus on assessment level is taken in AKG's additional with profits focus. Assessment here is on financial strength (together with Future Performance and Transparency) at a fund and sub-fund level, which is most relevant to customers' propositions and interest.
Assessment Sectors
It is also important to understand the sector approach (comparative peer groups) that is adopted in our financial strength assessment and rating process.
At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this purpose, i.e. as a component in helping customers’ advisers to select between comparable companies delivering a relevant product or service.
AKG assesses and rates companies and other entities within specific peer groups or sectors. Such peer groups are fundamentally designed to reflect how customers and their advisers consider companies for use.
Overview of Sectors
Provider
The Provider Peer Group
Companies in this peer group include long term insurance companies and friendly societies, but also encompass other entities which are also involved in the provision of financial products and wrappers such as pensions, packaged savings and investments, annuities, protection and some medical/healthcare offerings.
The sector was previously known as the “Life Companies, Friendly Societies & Similar Providers Peer Group”, with this now being abbreviated to “Provider”. However, whilst the name has been abbreviated, the sector remains the same in terms of its constituent peer group and comparative assessment.
This peer group excludes simple deposit-based saving available from bank and building society entities and specific fund management. It should also be noted that this peer group is separate from other peer groups assessed and rated by AKG, such as Platform Operators or Offshore Life Companies.
A number of different types of organisation therefore compete with one another in the market for these products or propositions referred to above as included in this peer group. Data shown in these reports will therefore necessarily exhibit certain differences by entity type. However, AKG undertakes assessment of this data and other information, within this peer group, on a consistent basis. This leads to comparable assessment conclusions as well as comparable ratings.
The sector is focussed on companies authorised and regulated in the UK and operating in the UK market. This also includes branch operations of overseas companies established and operating in the UK.
Companies Appearing in More Than One Rating Sector
As a result of AKG’s underlying focus on how customers and their advisers use companies, together with the fact that companies (individual corporate entities) can establish activity in different areas, it is possible that they will need to be assessed in more than one sector.
Thus the same individual corporate entity may be rated once in one particular sector context or peer group and then again in another.
This approach delivers ratings on a sector by sector basis, that is more reflective of customer and adviser focused comparison.
Care should be taken by users in considering the appropriate sector and therefore rating when this occurs. For example a single company might be used as a platform operator, but also itself act as the provider of a SIPP product wrapper. When considering that company in the delivery of the platform, then the rating given by AKG within its Platform rating sector should be used. However, when considering that same company for use in the delivery of the SIPP product wrapper (i.e. for accepting this business as a product provider), then the rating given by AKG within its Provider rating sector should be used.
Rating Sector Origin and Evolution
This rating sector peer group originated AKG’s financial strength rating activity some 30 years ago. Then it was almost entirely comprised of life companies, who competed with one another in the intermediated sales channel, distinct from any other types of provider.
However, since then different types of provider companies have increasingly competed with one another and more and more entities have had to be considered by intermediaries, either as potential new business providers for their clients, or within reviews of existing arrangements. Thus to remain in line with how customers and their advisers need to consider the range of providers available to them and reflective of how the market has changed, this sector peer group has evolved in recent years. Most recently in 2014 with the addition of non life company SIPP providers. The sector constituents are subject to ongoing review.
Offshore
The Offshore Life Company Peer Group
This sector covers offshore life insurance companies.
Offshore business can be defined as business that is written by a company (or a branch) that is not based in the policyholder’s country of residence.
The market has its origins dating back to the Second World War. It was British in origin, designed to provide protection from the economic uncertainties that followed. The first products were based around private banking aimed at offering a tax free environment to the wealthy. It has moved on substantially since then and now offers a wide range of financial services in a number of jurisdictions.
The main reason for investing offshore remains the ability to benefit from a gross roll up of assets. An increasing number of investors are nowadays considering the offshore market, and doing business with an offshore company is no longer exclusively for the ultra-rich, although they remain a very important sector. Whilst the majority of products may have slightly higher minimum premiums than their onshore equivalent, offshore business is now aimed at a much wider customer base, who are increasingly becoming used to a more global perspective on investments.
Other attractions for some investors are the privacy laws that operate in some jurisdictions, and access to a wide range of investments throughout the world. Unit linked single premium bonds represent by far the major product line. A range of active and passive funds are offered with some providers specialising in certain areas. Products can also be broken down into investment bonds, where the funds are managed in-house, and portfolio bonds, where access to external fund managers is also offered. A number of providers have also designed their products for inheritance tax purposes. A limited number of providers offer access to a with profits fund, typically via reinsurance back to an onshore parent. More recently, some providers have extended their product range and now offer protection plans and long term care products.
This AKG peer group is currently exclusively comprised of life companies (hence its description), due to their dominant activity in meeting the requirements of the UK intermediary sector and other advisers for offshore propositions.
The name of this sector is shortened to 'Offshore' for use where required.
Offshore locations covered
Most of the offshore business from UK clients is placed with companies in the UK dependent territories, such as the Isle of Man and the Channel Islands, or in EU member states such as the Republic of Ireland and Luxembourg. Hence, AKG’s assessment is primarily focused on companies distributing into the UK market from these jurisdictions. All these territories benefit from stable governments, strong regulatory controls and investor protection measures.
Rating Sector Origin and Evolution
AKG’s original focus was predominantly on UK life companies. This was expanded over a decade ago to include offshore life companies, due to intermediary need.
The offshore life company market has its origins dating back to the Second World War. It was British in origin, designed to provide protection from the economic uncertainties that followed. The first products were based around private banking aimed at offering a tax free environment to the wealthy. It has moved on substantially since then and now offers a wide range of financial services in a number of jurisdictions.
The sector constituents are subject to ongoing review.
Platform
The Platform Peer Group
This sector covers companies positioned as platform operators or as providing a significant integral component of a platform service operation. i.e. companies that might be seen to compete in the delivery of platform services and capability.
In the UK, financial advisers are required to consider the financial strength of organisations such as platform operators that they might use. Others also need information on which to assess platform operations.
Defining the extent and boundaries of the platform market or what organisations can be deemed to be platform operators can be difficult and regulatory bodies acknowledge that activities differ among platform models and that the core function of a platform service may evolve over time.
The FCA definition of a ‘platform service’ is a service which:
“involves arranging and safeguarding and administering assets: and distributes retail investment products which are offered to retail clients by more than one product provider; but is neither solely paid for by adviser charges, nor ancillary to the activity of managing investments for the retail client.”
AKG Platform Financial Strength Assessment Reports are designed to cover the primary entities which fall within AKG's description and are active in the UK intermediary market. They are thus primarily designed to meet the information needs of advisers.
Rating Sector Origin and Evolution
Traditionally AKG’s focus has been predominantly on life companies. However, in light of the growing impact of platforms and the transformation that this is bringing to the financial services market in the UK, there has been an increasing demand from intermediaries in particular to widen the scope of entities that receive specialist AKG assessment.
Overall, the aim of AKG’s assessments is to provide independently evaluated information to assist in the choices made by the intermediary as well as to help in the understanding and appropriate development of the market. In line with its core focus, AKG’s assessment is primarily focussed on financial strength. AKG considers that a major consideration for an intermediary in considering a Platform provider is the comfort and assurance that can be obtained from an independent, external assessment. It is an important component in seeking to avoid the operational complications and potential brand damage that would be incurred should a chosen Platform proposition encounter any financial difficulties, suffer a restriction on necessary investment to deliver required evolving functionality, or in some other way ‘fail’.
The sector constituents are subject to ongoing review.
International Platform
The International Platform Peer Group
This sector covers companies positioned as international platform operators or as providing a significant integral component of an international platform service operation. i.e. companies that might be seen to compete in the delivery of international platform services and capability.
In the UK, financial advisers are required to consider the financial strength of organisations such as international platform operators that they might use. Others, including those advisers in other jurisdictions, also need information on which to assess international platform operations to meet regulatory and/or best practice responsibilities.
Defining the extent and boundaries of the platform market or what organisations can be deemed to be platform operators can be difficult and regulatory bodies acknowledge that activities differ among platform models and that the core function of a platform service may evolve over time.
The FCA definition of a ‘platform service’ is a service which:
“involves arranging and safeguarding and administering assets: and distributes retail investment products which are offered to retail clients by more than one product provider; but is neither solely paid for by adviser charges, nor ancillary to the activity of managing investments for the retail client.”
Given increasing commonality of regulatory requirements, best practice and advisory business models, this definition can also be broadly applied in the wider context of (the) international advisory environment(s).
AKG International Platform Financial Strength Assessment Reports are designed to cover the primary entities which fall within AKG's description and are active in the intermediary market. They are thus primarily designed to meet the information needs of advisers.
Rating Sector Origin and Evolution
Traditionally AKG’s focus has been predominantly on life companies. However, in light of the growing impact of platforms and the transformation that this is bringing to the financial services market, including the international advisory arena, there has been an increasing demand from intermediaries in particular to widen the scope of entities that receive specialist AKG assessment.
Overall, the aim of AKG’s assessments is to provide independently evaluated information to assist in the choices made by the intermediary as well as to help in the understanding and appropriate development of the market. In line with its core focus, AKG’s assessment is primarily focussed on financial strength. AKG considers that a major consideration for an intermediary in considering an International Platform provider is the comfort and assurance that can be obtained from an independent, external assessment. It is an important component in seeking to avoid the operational complications and potential brand damage that would be incurred should a chosen International Platform proposition encounter any financial difficulties, suffer a restriction on necessary investment to deliver required evolving functionality, or in some other way ‘fail’.
The sector constituents are subject to ongoing review.
DFM
The DFM Peer Group
This sector covers Discretionary Fund Managers (DFMs).
In the UK, financial advisers are required to consider the financial strength of organisations such as DFMs that they might use. Others also need information on which to assess Discretionary Fund Managers (DFMs).
The DFM sectors comprises a significant number of firms. Many are very small and only a relatively small proportion of these operate to any scale and extent in the intermediary market.
AKG DFM Financial Strength Assessment Reports are designed to cover the primary entities which fall within this description and are active in the UK intermediary market. They are thus primarily designed meet the information needs of advisers.
Rating Sector Origin and Evolution
Traditionally AKG’s focus has been predominantly on life companies. However, in light of the growing impact of other types of entity such as DFMs and the transformation that this is bringing to the financial services market in the UK, there has been an increasing demand from intermediaries in particular to widen the scope of entities that receive specialist AKG assessment.
Overall, the aim of AKG’s assessments is to provide independently evaluated information to assist in the choices made by the intermediary as well as to help in the understanding and appropriate development of the market. In line with its core focus, AKG’s assessment is primarily focussed on financial strength. AKG believes that a major consideration for an intermediary in selecting a DFM provider is the comfort and assurance that can be obtained from an independent, external assessment. It is an important component in seeking to avoid the operational complications and potential brand damage that would be incurred should a chosen DFM proposition encounter any financial difficulties, suffer a restriction on necessary investment to deliver required service and investment expertise/ capability, or in some other way ‘fail’.
The sector constituents are subject to ongoing review.
Is Financial Strength just about solvency or return of money to customers?
There are a couple of common, but understandable misconceptions associated with financial strength assessment.
Firstly, that financial strength is purely about solvency. It isn’t. Whilst solvency will always be important and a factor in financial strength assessment, it isn’t the whole picture.
The definition of customer oriented and operational financial strength is useful here and at AKG we believe that a financial strength assessment should include the definition:
"...to go beyond purely a consideration of solvency (albeit this will always be an important part of the mix) and consider in what format an organisation may be able to survive to meet the reasonable expectations of customers and their advisers. Expectations, which must include the experience encountered by these two groups, will therefore include ongoing operational abilities and performance."
This definition is then also relevant to the misconception of believing that financial strength is just about the recovery of client assets.
Recovery of assets is of course crucial, but to restrict financial strength consideration to this could be misleading and falls below the requirement to deliver a broader set of customer outcomes.
Many businesses such as platforms, DFMs, asset managers, or even financial advisers can sometimes make this mistake. Thinking ‘well, the assets sits with a custodian, or there is a policyholder protection scheme which will kick in, so my financial strength won’t matter.’
Is that good enough? Effectively saying that if that part of the customer value chain, somehow fails or is impaired, there will be no change in customer experience.
Unfortunately, that simply isn’t the case. The route to asset recovery or protection funds/compensation is not the experience the customer reasonably expected when they signed up. And the uncertainty, delay and distress cannot be so easily dismissed.
You can find more information as to how AKG applies this financial strength analysis to assist the market through the provision of ratings and reports across a number of sectors.