Insurance business transfers under FSMA Part VII: the PRA's approach

Out-Law Guide | 24 Jun 2015 | 9:50 am | 5 min. read

Part VII of the 2000 Financial Services and Markets Act (FSMA) sets out the statutory mechanism allowing insurers and reinsurers to transfer portfolios of insurance business from one entity to another, subject to court approval.

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.

Background

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:

  • Removal of references to the 'appropriate regulator'. The provisions in the SoP provide a more definitive description of the PRA's role as the lead regulator. The move away from the 'appropriate regulator' references and clear statements on how the PRA will lead and manage a single administrative process is a useful clarification for firms;
  • Removal of need to approach the PRA first. SUP18 suggested that scheme promoters should approach the PRA first when considering an IBT, but this has been removed from the SoP which means that firms can initially discuss any plans for IBTs with either the FCA or the PRA first. As IBTs involve a mixture of prudential and conduct considerations, commencing IBT discussions with the FCA can help make the process move more quickly when a firm envisages more regulatory input on the conduct side.
  • Assessment of suitability of independent expert nominees. Independent expert nominees may now be assessed against a broader set of criteria than before when the PRA assesses their suitability. In the defunct SUP18, the PRA had stated that it would consider the "general principles set out in SUP5.4.8G for suitability of a skilled person". The SoP takes this further, stating that the more comprehensive principles set out in the PRA's Supervisory Statement SS7/14 (Reports by Skilled Persons) will apply to assessing the suitability of the independent expert.
  • Supplementary reports are now explicitly expected from the independent expert. Although this is not new regulatory policy, it formalises a practice that was taking place even in the FSA's early days when considering IBTs.
  • Relaxation of the PRA's position in granting a certificate where a transferee is not meeting its solvency margin requirements. In the SoP, the PRA states that it will not be able to "reply favourably" in these cases, rather than not issuing a solvency margin requirement certificate in any circumstances where the transferee was not meeting its solvency margin requirements as was the case under SUP18.
  • Removal of references to "unfairness". The PRA has drawn a clear distinction between its role and separate statutory objectives and those of the FCA by not including any references to objecting to the scheme if it is "unfair" to a class of policyholders, and not expecting any "further notification" if it is not satisfied that policyholders have received adequate information in the SoP. The concepts of "unfairness" and "policyholder disclosure" are strongly embedded in the FCA's regime.
  • However, despite "policyholder disclosure" being more synonymous with the FCA regime, the SoP does introduce a new PRA notification expectation where an IBT involves the transfer of business from a branch established in the UK to an organisation outside the UK.

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.

Final thoughts

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.