FCA Guidance on Reviewing Part VII Insurance Business Transfers
The following interview with Nicholas Thompsell of Fieldfisher LLP was published in Lexis PSL on 13/06/2017.
What is the background to FCA’s consultation on proposed guidance on the insurance business transfer scheme?
Although transfers of insurance business are to some extent harmonised though the Solvency II Directive (2009/138/EC) member states are largely left to deal with the form and procedure for portfolio transfers according to their national law, and in fact the procedures operated in the UK are overall little changed from those that have been in place for many years. The UK is relatively unusual in adopting what is essentially a court-based mechanism for this, albeit one that also involves input from the regulator.
An insurance business transfer scheme allows the contractual rights of policy holders to be transferred and, even to some extent changed, without the policyholders'' individual consents and so it is not surprising that the process includes various safeguards, including publicity for the proposal, an opportunity for those objecting to register their objections, the opportunity for the FCA to be represented at the court hearing and the need for the report of an independent expert (who will need to have the relevant actuarial experience) to confirm the effect of the proposal on the security of policyholders' benefits.
The last few years have seen a reasonably substantial amount of merger or transfer activity and the FCA has taken this opportunity to put together draft guidance as to how it approaches its role in relation to transfer schemes, and what expectations it has of firms engaged in a scheme and of the independent experts whose reports represent one of the most important safeguards for the arrangements.
Who will the FCA guidance affect?
The guidance needs to be read by any firm that is thinking of acting as a transferor or transferee under a scheme, by the lawyers advising on the scheme and, in particular, by anyone who is proposing to act as an independent expert as it provides useful insights into how the FCA's general expectations. The FCA has assessed within its own cost benefit analysis that this guidance may assist and reduce the compliance costs to firms for around 20 transactions a year. This appears to be the FCA's assessment of the average number of transactions a year where the FCA considers that its requirements have not already been taken on board. This seems a little surprising since much of the guidance seems to be fairly straightforward, if not obvious, to practitioner experience in this field, but one supposes that the FCA must have good reason for concluding this.
How will the transfer guidance impact firms, especially those that diverge from the guidance?
Generally the draft guidance contains little that is surprising and will not give rise to any major changes in how firms go about undertaking a transfer scheme. The emphasis on contacting the FCA and the PRA early will, no doubt, be taken on board. Perhaps one of the most useful areas of the guidance is the section on what the FCA expects in relation to the independence, skill, experience and resources of the independent expert, since getting the choice of an expert wrong could cause a major setback to the timetable for a transfer scheme. The focus that is given on how the FCA will be looking to apply its statutory objectives, including an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK financial system and promoting effective competition in the interests of consumers again is hardly a surprise, but having this set out so clearly well help participants address these issues in how they present the proposals in the transfer document.
Another thing which comes out clearly from the draft guidance is that the regulators are looking for complete clarity on which liabilities if any remain with the transferor after the Scheme is effected, and the expectation that all proceedings which are in train, pending, threatened or in contemplation will continue against transferee. Less intuitively, and somewhat delphically, the FCA states a requirement that proceedings described as "current, threatened or pending" should also include "any other claims or complaints which may be brought in the future including those not yet in contemplation". Presumably this means circumstances where the putative claimant may have a claim but has indicated that he is not contemplating making that claim rather than asking firms to report on things that they cannot contemplate. Firms may want to ask for this to be clarified further in the final guidance since this does affect negotiations between transferor and transferee and the wording of transfer schemes.
The draft guidance concerning the leeway over the effective date of the scheme includes a shot across the bow for firms that are seeking to obtain flexibility to depart from the originally mooted timetable and will mean that firms will need to take the timetable seriously.
The draft guidance relating to the presentation of information is generally helpful. One does see transfer schemes where important information relating to risk is contained in the independent experts report but is not well-highlighted and the guidance will mean that there is no excuse for this.
The FCA's explanation of how it regards applications to dispense with notification requirements publication is detailed and helpful, although it indicates a fairly firm line and the need for an evidence –based approach to these issues. Some firms may wish to challenge the relatively unsympathetic approach indicated as to the problems of dealing with poor contact details or historic gone-away cases.
Perhaps, the part that will be most closely read relates to the form and content of the Independent expert's report where the FCA give a strong indication of what they're looking for the report to include and, by inference, where reports they have seen have fallen short in the past.
Having given the guidance the FCA will feel justified in taking umbrage if the guidance is flouted. Whilst it is for the court rather than the FCA to approve the transfer, a court would take seriously any reservations the FCA expressed about the quality of information given to investors or the qualifications or independence of the independent expert and so the main threat would be that the FCA would raise points at the hearing. In serious cases where the FCA considered that its guidance was being ignored the FCA might take further action on more general grounds such as a failure to treat customers fairly, but this is probably a less likely outcome than the outcome that the FCA could cause the transfer to be aborted or at least adjourned.
What should lawyers advise their clients in light of the guidance?
Read the guidance! Lawyers may wish to create templated checklists to ensure that the main elements of the guidance have been followed (or if there is a reason to deport from any element of the guidance that the reason is noted and discussed with the FCA.
Where does this fit with other developments with the FCA/within the insurance sector?
The implementation of Solvency II has put a renewed focus on insurer's balance sheets and insurance transfers often present an attractive solution for balance sheet restructuring. The FCA clearly sees that there will be a continued appetite for transfers and is seeking to reduce its requirement to make representations in relation to poorly conducted processes by nipping problems in the bud by issuing more detailed guidance.
Are there any particular issues/concerns for trustees or members of pension schemes or for buy-in/buy-out activity?
This paper is essentially about procedure rather than content and so it does not of itself raise any major issues. Insurance transfers will remain an important tool for trustees of pensions schemes to manage risks. Members will remain protected by a procedure that is there to protect their interests. All that will change, assuming the draft guidance is confirmed, is that the FCA's expectations are clearer.