Proposed government legislation to introduce a new insurance linked securities (ILS) framework to the UK was considered by the House of Lords on 11 November 2015. The proposals are contained in amendments to the Bank of England and Financial Services Bill. The aim of the amendments is to give powers to HM Treasury to make regulations for creating and regulating structures required for ILS business, and would allow Treasury ministers to make regulations for all aspects of ILS activities. Specifically, the Treasury would be granted the power to make regulations in relation to the establishment and operation of the transformer vehicles, the special purpose vehicles used in ILS transactions, and in relation to the trading of investments issued by such vehicles.
The proposals have been welcomed by the insurance industry, and are widely seen as a vital step in developing the legal and tax frameworks which are necessary if London is to become a centre for ILS activities. Specifically, it is proposed that Lloydís will be granted powers to regulate transformer vehicles used in ILS transactions. It follows that the proposals would in time lead to Lloydís entities being permitted to create ILS vehicles. The London Market Group ILS taskforce is initially focussing on collateralised reinsurance business rather than catastrophe bonds, which are already established in other ILS domiciles such as Bermuda.
If London is to attract ILS business, creating the necessary legal structures is evidently important. However, a key question arises as to how investors will be taxed. The London Market Group ILS taskforce has been working alongside HMRC to set up a mechanism by which the UK would be able to compete with other low tax ILS domiciles. Reports indicate that officials are considering a scheme by which investors would be taxed when they exit the ILS structure, with the applicable tax regime being that of the investorís domicile and the location of the exposure. Such a structure would potentially allow investors to take advantage of a more favourable tax regime, without the need to reduce UK tax rates. Specifically, a non UK-domiciled investor providing capital to insure a risk outside the UK would not be liable to UK tax.