Out-Law Guide | 24 Jun 2015 | 9:50 am | 5 min. read
This guide was last updated in June 2015.
On 1 April 2015, the Prudential Regulation Authority (PRA) published a statement of policy setting out its approach to and expectations of Part VII insurance business transfers (IBTs). This policy statement replaced the previous guidance contained in its regulatory handbook, as supervision manual chapter 18 (SUP18).
The statement of policy does not represent a policy change: its provisions are, essentially, the same as the guidance in the old SUP18. However, the new approach creates some scope for regulatory overlap and inconsistency, particularly as the standards set out in SUP18 still apply to the Financial Conduct Authority (FCA).
For the purposes of this guide, references to 'insurers' should be read as including 'reinsurers' unless otherwise specified.
An IBT is a regulatory mechanism, governed by sections 104 - 116 in Part VII of FSMA. The mechanism allows an insurer or reinsurer to transfer long-term and general insurance business from one legal entity to another, subject to the sanction of the court. Many firms use the statutory IBT procedure to give effect to group reorganisations and consolidations, and for the sale of insurance portfolios.
Although Part VII of FSMA, the regulations referred to it and related case law are legally binding, the most helpful information for firms in relation to IBTs has traditionally been the guidance contained in the PRA Handbook. Although this guidance was prepared to assist scheme promoters with the Part VII process and is not legally binding, it was important because a Part VII FSMA scheme will not receive the court's sanction if the regulators object. Adherence to their guidance was therefore implicitly a necessary condition of the scheme's success.
Historically, the guidance in the regulatory Handbook on IBTs was contained in the old Financial Services Authority (FSA) SUP18. In the immediate aftermath of the FSA's abolition, much of the content in the FSA Handbook was carried forward with consequential amendments to the FSA's successor regulators, the FCA and the PRA, at legal cutover (LCO) on 1 April 2013. Although the content of each successor regulators' Handbook contained much of the same material, and the SUP18 provisions appeared in identical form in both the FCA and PRA Handbooks at LCO, the PRA took a policy decision to move away from the legacy Handbook material towards having its own PRA Rulebook and other appropriate materials.
In November 2014, the PRA published consultation paper CP25/14 which contained proposals to redraft certain modules of the PRA Handbook including the PRA's now-defunct SUP18. Following the closure of this consultation, the PRA published a statement of policy on IBTs ('the SoP') on 1 April 2015 to replace the guidance in SUP18 of the PRA Handbook. SUP18 of the FCA Handbook was unaffected by the PRA's deletion of SUP18 from its own Handbook.
Switching from SUP18 to the SoP: the main changes
Although the provisions in the SoP are essentially the same as the guidance in the old joint PRA and FCA SUP18, the SoP does make some changes and formalises some existing practices. The most important of these are set out below:
There are particular PRA policy positions that are not represented in the SoP. For example, the PRA has consistently expected firms to provide the credentials of more than one independent expert from which it could approve a candidate. However, the SoP does not indicate that this is a PRA expectation.
Although the Solvency II Directive is explicitly referred to in the SoP, the SoP makes no reference to the additional certificate which the PRA will have to issue to the effect that the supervising authority in each EEA state other than the UK in which insurance contracts have been concluded by the firm has been notified of the proposed scheme. This seems like a strange omission, particularly as the SoP was published after the 2015 Solvency II Regulations were finalised and officially published.
Although the PRA's decision to publish its own SoP which more prominently defines its own role in the IBT process should generally be seen as positive, there still remains scope for regulatory overlap and inconsistency. For example, the FCA continues to rely on the SUP18 provisions in the FCA Handbook, some of which the PRA has deemed defunct or has set out a different policy on.
The best way to avoid any problems in this regard is for firms to have early discussions with both their supervisors at both regulators and their advisers; and to agree early on the designation of any responsibility which is unclear and a workable timetable that takes into account the needs and availability of all parties.