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Review of the Actuarial Profession by Sir Derek Morris

Sir Derek Morris has published his final report on his review of the UK actuarial profession. The report recaps the various options identified in his interim assessment published last December and sets out Sir Derek's final conclusions and recommendations.

Proposals

As expected following the interim assessment, Sir Derek has proposed an independent Actuarial Standards Board within the Financial Reporting Council and oversight of the Profession's other activities by extending the role - and the name - of one of the FRC's existing boards so that it becomes the Professional Oversight Board for Accountancy & Actuaries (POBAA).

The report leaves the detail of implementation to others. The Presidents and other senior members of the Profession have already held talks with the FRC, the FSA and several government departments.

The Review has also made recommendations on a range of other topics, including education, compliance monitoring, conflicts, market testing and communications. Brief details of those recommendations can be found here and can be found in full at the end of Sir Derek's report.

General reaction

We are very pleased that final report has followed the course mapped out in Sir Derek's interim assessment, which we supported in our published response. We had accepted the need for change even before the Morris Review was announced. Several reforms were already in place and others had been announced. The real benefits delivered by the Morris Review were the extension of our ideas in ways which the Profession did not have the power to deliver for ourselves.

We began this review process with confidence in the changes we had initiated, but receptive to new proposals. This stance has clearly been the right one. We think it is fair to say that there is nothing in the report that suggests the Profession was going in the wrong direction or failing to address any major issues.

As Sir Derek acknowledges in his report, "the review has built on changes already contemplated or initiated by the Profession". Sir Derek is particularly complimentary about the response of the Profession to the Review:

"[The Profession] does not accept all the analysis of the interim assessment; but has nonetheless adopted a forward-looking stance, recognising that significant change is desirable, seeking to work with the grain of the options for reform and providing constructive input into the review's finalising of its recommendations."

The tone of Sir Derek's report reflects the very thorough way in which the Review has assimilated information about actuaries and the work that we do. There are many aspects of the report which confirm our original impression that Sir Derek has acquired a real insight into the challenges facing actuaries and into our strengths as well as our weaknesses.

Response to the specific proposals

The Profession is very much in favour of an independent ActSB, with legislative backing, as an operating body under the FRC, sitting alongside the Accounting Standards Board and Auditing Practices Board. The ActSB will also have to work closely with the FSA, DWP and the Pensions Regulator so that the total regulatory environment delivers what parliament and the public expect.

To be fully effective, it is essential that the ActSB has appropriate funding. Sir Derek has recommended that pension funds and insurers should contribute to the costs, in addition to the Profession. (The FRC is currently funded by government, business and the accountancy profession.) The details have yet to be worked out.

We recognise that oversight of professional regulation has been the model favoured in other reviews such as those of the accounting and legal professions. In developing the oversight arrangements for our profession, it will be important to understand the differences between the regulation of accountants, which covers firms as well as individual accountants, and that of actuaries which currently regulates only individuals.

The review has clearly identified a number of problems in the regulatory framework - like all other professions, the model of self-regulation is no longer considered to be effective - and has proposed a remedy we are comfortable with. But so far as individual members are concerned, the extremely reassuring message is that Sir Derek's recommendations are designed to ensure that there continues to be an effective market for actuarial services (or a more effective market, depending on your view). There is no doubt that, having investigated the profession very thoroughly, Sir Derek has been impressed by actuaries as "dedicated, skilled professionals providing important and useful advice, with commitment, integrity and a strong sense of duty".

Michael Pomery, President, Institute of Actuaries
Harvie Brown, President, Faculty of Actuaries

Morris Review Recommendations

Regulatory framework

An Actuarial Standards Board (ActSB) should be created within the Financial Reporting Council (FRC) to set actuarial standards.

The existing oversight board for accountancy (POBA, an operating board within the FRC) should have its role extended to include oversight of the Profession's remaining functions, including education, CPD, compliance monitoring and discipline.

The FRC's Accounting Investigation & Discipline Board (AIDB) should be empowered to investigate and discipline in actuarial public interest cases.

Education

Greater academic and non-actuarial input into the ongoing development of the syllabus and associated teaching material and improved quality control in relation to exam-setting and marking.

The Profession, universities and employers should explore alternatives to the traditional education model of on-the-job part-time study, for example, a one-year postgraduate actuarial conversion course.

The Profession should proceed with its proposals for compulsory CPD and should ensure the scheme is targeted and relevant, taking account of syllabus changes.

Compliance monitoring

The FRC should ensure that there is monitoring of compliance against actuarial standards, with the FRC having powers to confer whistle-blowing duties.

Pensions: The Pensions Regulator should ensure that Scheme Actuaries' advice to pension schemes is subject to formal scrutiny by independent experts, either through its risk-based supervision, audit, or external peer review. The Review supports the Profession's introduction of peer review for pensions.

Life assurance: Companies should consider whether further review would be appropriate to cover actuarial advice that is not reviewed by the Reviewing Actuary.

General Insurance: The FSA should consider introducing a requirement for actuarial advice as part of audit, in both the company market and Lloyd's market.

Whistle-blowing

Clearer guidance from FSA, DWP and, in due course, ActSB on the circumstances in which whistle-blowing is permitted and when it is required. In the longer term, the Government should consider additional protection for whistle-blowers.

Scheme Actuary conflicts

If any of the three parties - trustees, Scheme Actuary or scheme sponsor - deem that a potential conflict of interest has emerged the trustees should have the option to retain the existing adviser and the sponsor should secure separate actuarial advice.

Reserved roles

Statutory roles should continue to be reserved to actuaries in life insurance and pensions, but the position kept under review. The FSA should consider introducing a requirement for general insurers to take advice from an approved person, but not necessarily an actuary.

Market-testing of actuarial advice

As a matter of good practice, users of actuarial services should undertake a formal re-tendering by advisers every six years, with informal reviews periodically in between.

User knowledge and understanding

The Pensions Regulator/NAPF/ABI should provide guidance to trustees and non-executive directors on the effective management of actuarial advisers including material to assist trustees and non-executives to challenge and question their actuarial advice.

Communication

There should be a technical standard on communication.

Separation of advisers

In line with the Government's proposed revision to the Myners principles, it is good practice for trustees to invite tenders separately for actuarial advice, investment advice and fund manager selection advice.

Liability caps

The review believes that there is not currently a case for a statutory liability cap; the level and cost of PII cover should be left to market forces.

Background

On 8 March 2004, the Government announced a review of the actuarial profession to be conducted by Sir Derek Morris, recently retired Chairman of the Competition Commission. The review began in May. The Government has asked Sir Derek to deliver his final report with recommendations by Spring 2005. The terms of reference of the Morris Review, as set out in the government's announcement, are reproduced below.

The Morris Review will be taking place in a profession where there is already a recognition of the need to change. The Councils of the Faculty and the Institute have jointly been conducting reviews of our own as a result of events at The Equitable. In his report on Equitable Life, Lord Penrose acknowledges some of the steps we have already taken and says that the Profession "should be encouraged in this task."

In February, we wrote to our members outlining further changes we had decided to make in the way actuaries operate: from the way standards are set and practising certificates issued through to reviewing professional advice and disciplinary action.

Naturally, we have opened our doors to Sir Derek and his team and offered our full co-operation as he carries out his work.

To assist the team we prepared a written introduction [pdf] to the UK Actuarial Profession, supplemented by briefing meetings.

Terms of reference of the Morris review

"Consider what professional and/or other regulatory framework would best promote recognised, high-quality and continuously developing actuarial standards, openness in the application of actuarial skills, transparency in the professional conduct of actuaries, accountability for their actions and an open and competitive market for actuarial advice in the UK.

In doing so:

Take into account developments in the actuarial profession, in regulation, and in the financial services market, in the UK and abroad;
Examine the role of actuaries in the financial services sector, including in providing actuarial opinions in relation to audited accounts;
Build on the work of recent government and regulatory initiatives;
Examine the relationship between the Government Actuary's Department and the actuarial profession and with other parts of government.

Recommend a framework that will be independent in representing the public and consumer interest, and be accountable, flexible, transparent, and no more burdensome or restrictive than is clearly justified.

Make recommendations on the future role of the Government Actuary, the functions of his Department and its future institutional status."