What is an insurance business transfer scheme?

Part VII of Financial Services and Markets Act 2000 ("FSMA") provides a statutory mechanism pursuant to which insurers and reinsurers can, with the sanction of the court, transfer the whole or part of their business without having to obtain consent from individual policyholders.

The PRA and the FCA play a significant role in these transfers.  Applicants are required to consult with the regulators at an early stage so as to ensure that the intended transfer is consistent with their statutory objectives.  Following this consultation process, the regulators then submit a report to the court setting out their views on the transfer.

The PRA and FCA both have detailed guidance notes1 which outline the criteria they expect applicants to meet when seeking approval for a transfer.  In July 2021, the PRA and FCA published consultation papers2 setting out proposed changes to their respective guidance notes. The proposals reflect legislative amendments implemented as a result of Brexit, and also provide important clarification regarding the regulators' expectations of independent experts ("IEs") and applicant firms in the Part VII process.

1. Summary of the FCA's key proposals

  1. Independence of the Proposed Expert
    The proposals confirm that the FCA will consider not only the independence of the IE but also whether the peer reviewer who has been nominated by the applicant is sufficiently independent.  If a suitable candidate for peer reviewer cannot be identified in the same firm as the IE, the applicant may need to identify a candidate from a separate, unrelated firm.
    Further, the FCA has clarified that the requirement of sufficient skill and experience applies across the entire IE team, including the IE's core support team and peer reviewer and it will consider the credentials of all members of the team.
  2. Timing
    It is clear from the proposals that early engagement with the FCA remains key.  The consultation paper confirms that when applicant firms submit documents to the FCA for review, they should be in near-final form and applicants must provide the FCA with a minimum of six to eight weeks to review documentation.
  3. General expectations
    The proposals clarify that where a judgement call has been made by the applicant regarding the FCA's guidance, or there is room for discussion as to whether a particular aspect of the guidance has been followed, the FCA expects this to be brought to its attention in good time.
    In addition, the FCA has confirmed that firms should proactively give consideration to whether there are any particular issues concerning the transfer which the FCA may want to consider, with a senior manager within the applicant firm taking responsibility for this. This includes, but is not limited to, material conduct issues arising on the scheme where the applicant and/or IE consider that a judgement call has been made on a matter that is not straightforward or where there may be scope for affected policyholders to raise concerns.  The consultation emphasises that applicant firms should take a pro-active approach to raising any such issues with the FCA.   
    The applicant firm and the IE will ultimately need to confirm in the witness statement and IE report that they have acted in accordance with the FCA guidance and have fully taken into account what may be of interest to the FCA.  Alternatively, they will need to explain why they have deviated from the guidance.
    These proposed changes confirm that the FCA requires applicants and IEs carefully to follow its guidance and if that is not possible, to provide details to the FCA as to why that is the case.
  4. Communications Strategy and use of digital means of communication
    The proposals recognise the wider use of digital communication methods in the industry and accept that firms may wish to send notices to policyholders electronically.  It highlights the factors the FCA will take into account when determining if this is appropriate, including whether communications with the customer are customarily conducted in electronic form; whether there is up to date contact details for the customer and if there is a proposed method for managing failed delivery.
  5. Changes affecting policyholders
    The FCA has clarified that when assessing the potential impact that a transfer might have on policyholders, consideration should be given to any changes to claims philosophy or plans to accelerate run-off.  The applicant and IE should also be able to demonstrate that they have considered the scheme's impact on vulnerable policyholders and how vulnerability was taken into account in the design of the documents.
    The FCA also expects the applicant firm and the IE to have "done enough" to identify previous statements made by the applicants (such as on their website or in communications with policyholders including policy documents), which policyholders could reasonably seek to rely on to object to the scheme, and to consider whether the policyholder communications address these issues in sufficient detail and with sufficient prominence.
  6. Objections from policyholders
    The proposals underline the need for applicant firms to respond to any objections from policyholders in a timely manner, and note that suitable arrangements should be in place to escalate complex queries or difficult objections to ensure that they have been appropriately and considerately addressed.
    The FCA reiterates that due consideration should be given to objections and applicants should allow for the possibility that the scheme may need to be changed in light of objections received. The IE will also be required to consider whether the applicants have done enough in their response to address the concerns raised by policyholders.

2. Summary of the PRA's key proposals

  1. Transfers of business in run-off

    One of the key points of focus in the PRA's consultation is transfers of business in run-off.  The PRA has indicated that schemes involving transferees in run-off may pose a greater risk to its statutory objectives and it includes two new proposals with a view to mitigating this risk:
    1. Where a scheme involves non-life business in run-off which meet certain criteria (i.e. have technical provisions of over £100 million and will increase the transferee's technical provisions by 10% or more), the PRA will utilise its powers to assess the operational readiness of the transferee at the outset of the Part VII transfer process; and
    2. Where a transferee is in run-off (or is in the business of acquiring books of business in run-off) it will need to demonstrate to the PRA that it has considered both its existing risks and risks it is acquiring over the ultimate time horizon, until the risks taken on are fully run-off.
  2. Guidance for Independent Experts

    The PRA also highlights that the independence of the proposed expert is vital and indicates that the IE should continue to assess their independence throughout the Part VII process and promptly notify the Regulators where they believe there may have been a change.  When assessing the IE report, the consultation paper clarifies that the PRA will take into consideration whether the report covers in sufficient detail all the issues that appear to be relevant and incorporates appropriate reasoning. The proposals further confirm that the IE's opinion of the likely effects of the scheme should be assessed not only at firm level but also at policyholder level and should analyse and conclude how groups of policyholders are affected differently by the scheme. The IE should also consider whether it is necessary to conduct their own stress and scenario testing or to request the relevant firms to conduct further stress and scenario testing of the transferor's and transferee's respective abilities to measure, monitor and manage risk.

Next steps

The PRA's consultation is due to close on 28 October 2021 and it intends to publish the changes resulting from the consultation by 29 November 2021.  The FCA's consultation ended on 31 August 2021, however, it has not yet confirmed a date for issuing its revised guidance.

Conclusion

The proposals provide insight into the regulators' expectations of firms and IEs in the Part VII process.  The regulators' approval of a transfer is critical to the success of the transfer and firms should pay close attention to the revised guidance when preparing Part VII applications to ensure that they are complying with the regulatory requirements.  This will help to avoid the delays that applicants may otherwise encounter in having to revise applications during the consultation phase with the regulators.

Footnotes

1 PRA's Statement of Policy ("SoP") "The Prudential Regulation Authority's approach to insurance business transfers" and the FCA's guidance "FG18/4: The FCA's approach to the review of Part VII insurance business transfers".

2 PRA's Consultation Paper (CP16/21) "Insurance business transfers" published 28 July 2021, and the FCA's Consultation Paper (GC 21/3 "Proposed changes to guidance on the FCA's approach to the review of Part VII insurance business transfers" published 8 July 2021. 

Originally published 30 September 2021

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