British regulators have fined Sun Life Assurance Company of Canada (UK) Ltd. £600,000 ($950,000) over governance failings in the management of its so-called “with-profits” business during the financial crisis.

The UK’s Financial Services Authority (FSA) announced Thurday that it has fined Sun Life over governance arrangements, that it says “were unclear and inadequate, resulting in a high risk that policyholders’ interests would not be protected properly.”

The alleged failings concerned the firm’s “with-profits” business, which is a type of pooled investment fund sold in the UK, typically by insurance companies.

In this case, the regulator says that the firm’s governance failings came to light following two significant derivatives transactions that were executed in 2008 and 2009, in order to protect the equity exposure of one of its with-profit funds (which had £1.2 billion in assets and 114,000 policyholders) at a time when markets were in turmoil.

According to the decision, at the height of the crisis in November 2008, Sun Life identified that the fund was at risk of becoming insolvent if the value of its equity holdings continued to fall. So, it decided to enter into a major derivatives transaction to protect against that possibility. And, it later restructured that transaction.

The FSA notes that it is not criticizing the merits of the transactions, but that it has found that the review and approval process followed by the firm was deficient. It says that Sun Life’s with-profits committee failed to adequately review the transactions, and its board of directors did not approve them.

In the regulator’s view, this lack of oversight, “led to an unacceptable risk that proper independent judgement would not be applied to the transactions.”

Moreover, it says that the firm should have been well aware of its concerns about appropriate governance in the with-profits sector. As, in September 2007, the FSA wrote to CEOs of with-profits firms drawing their attention to the need for their governance arrangements to include independent challenge of decisions concerning policyholders.

The FSA says that the with-profits business allows firms considerable discretion in managing funds, which can give rise to potential unfair treatment of policyholders. “It is critically important for firms running with-profits business to have in place clear and adequate governance arrangements. Independent challenge of management’s decisions is essential to ensure policyholders are fairly treated,” it stresses.

“It is essential that insurers operating with-profits funds ensure policyholders are properly protected. Independent judgement must be properly applied to issues that affect the interests of policyholders,” says Tracey McDermott, director of enforcement at the FSA. “The firm fell below the standard required. Its with-profits committee and board, who had primary responsibility for the fair treatment of policyholders, were not adequately consulted on two significant transactions. This was an unacceptable approach to protecting policyholders.”

The FSA adds that Sun Life would have been fined £750,000, but agreed to settle and qualified for a 20% discount on the penalty.