4.7. FACTSHEET- MUTUAL FUND/POOL

A mutual fund/pool is a mechanism by which a group of operators may satisfy financial provision requirements by demonstrating their membership of it. Acceptance into the mutual fund/pool requires the members to provide evidence of a specified amount of financial provision, and/or to pay a specified amount into the fund/pool each year. Members must agree to pay up to a specified (or unspecified) amount if a member of the fund/pool fails to do so. If the amount of such payment exceeds the monies held by the fund/pool, an additional drawing may be made on the members.

A mutual fund/pool may be used as financial provision for unforeseen incidents. It is not feasible for first-party cover for foreseen liabilities because this is a responsibility that must be carried out by individual operators as part of their permit or licence commitments. However, a mutual fund/pool may, depending on the nature of the pool, be used to cover the foreseen liabilities of a member that has become insolvent. Mutual funds/pools can be viewed as contrary to the polluter pays principle.

ADVANTAGES

DISADVANTAGES

✓ The cost to operators may be relatively low and does not tie up capital.

✓ May avoid the complexity and costs associated with establishing, maintaining and monitoring financial securities on a site-specific basis.

✓ May reduce the risk of a financial provision failing in any given case for legal or other issues.

✓ Should not be affected by negative changes in the financial viability of individual members or their insolvency or dissolution as long as the amount of assets in the fund/pool is sufficient to pay a claim(s) and/or other members have sufficient funding to respond to a call for additional funding in the event of a claim.

✓ Potential to provide a source of funds for large-scale losses.

✓ Potential to provide a source of funds where a member has entered into insolvency proceedings.

✓ Depending on the structure of the pool, contributions may be segregated from the operator’s assets, meaning that they are likely to be beyond the reach of its creditors should it enter into insolvency or dissolve.

✓ Protects operators themselves from the financial consequences of environmental liabilities arising by spreading costs among members.

✓ Capacity to ensure that funds will be available to cover liabilities arising in the mid to long term.

✓ Where the amount that a member is required to contribute is determined by its individual risk profile (i.e. contributions are differentiated), this provides an incentive for it to reduce the risk.

✓ Where provision of an environmental management system is a requirement of membership, this provides an incentive to members to adopt them in order to be able to gain and continue their membership and lower their contribution (if relevant).

X Cost, time and expertise needed to establish and monitor the mutual fund/pool.

X May be perceived as failing adequately to implement the ‘polluter-pays’ principle. Membership may be strictly limited, making it unavailable to many operators.

X Where contributions are not differentiated according to the risk of the individual member, members may not be as motivated to improve their safety levels.

X Where the terms and conditions for payment from the fund/pool are construed overly strictly, this may make it difficult to draw upon when necessary.

X May not be feasible to establish a fund/pool for diverse operations; funds/pools tend to be used mainly for specific industrial or other sectors.

X The mutual fund/pool may provide insufficient cover in the event of multiple calls on the pool; for example, where the industry covered by the pool goes into decline.

Important considerations – financial institution guarantee

Basic considerations	Careful attention will need to be paid to the structure, management and governance of the mutual fund/pool. The fund should be ring-fenced for environmental liabilities and protected from investment risk.
Documentation	In addition to the standard documentation, evidence of continued membership may be required.
Documentation specification	In addition to the standard specifications, specification of joining criteria, specification of the structure, and governance and management of the mutual fund/pool may be required.
Reporting and monitoring	In addition to the standard requirements, reporting and monitoring of payments in, maintenance of membership and breach of membership criteria may be required.
Enforcement	In addition to the standard requirements, the regulator will need to ensure that membership of the mutual fund/pool is maintained and may need to act in the case of declining financial health of the mutual fund/pool or the industry.