There are a number of recent proposals for reform in the law and practice regarding insurance business transfers under Part VII of the Financial Services and Markets Act 2000, commonly known as Part VII transfers. The main changes fall into two categories:

  • a new ‘Part VII-lite’ procedure for pure reinsurers; and
  • a new approach to the Financial Services Authority’s (FSA’s) supervisory function on Part VII transfers.

A reminder of the current position

The Part VII regime allows books of insurance business to be moved from one insurer to another by way of a transfer scheme, which can also provide for the transfer of assets, including reinsurance, and other ancillary matters. As it relates to direct insurance, the regime is based on European legislation (the Life Assurance Consolidation Directive and the Third Non-life Directive).

The procedure can be costly and time consuming. It comprises the following basic steps.

  • The FSA nominates or approves an independent expert (usually an actuary), who prepares a report on the terms of the transfer scheme, considering the position of transferring policyholders, those left behind and those already in the transferee company.
  • The FSA will then consider the scheme, for example to ensure that it takes into account the interests of customers and treats them fairly. It will then object or approve in principle.
  • The companies promoting the scheme then notify interested parties, usually by sending an explanatory statement with a copy of the expert’s report and placing notices in newspapers (in more complex schemes, it is usual to apply for detailed court directions on this).
  • The FSA will then seek consent of other relevant European regulators, and policyholders will have a period in which to make representations.
  • Finally, the companies apply to court for sanction of the scheme. Both the FSA and any interested party that considers it would be adversely affected are entitled to be heard at the court hearing.

The European legislation ensures that, once sanctioned, the scheme is entitled to automatic recognition throughout the European Economic Area (EEA).

Part VII-lite

One of the main provisions of the EU reinsurance directive is the introduction of portfolio transfers for pure reinsurers. Reinsurance transfers are already allowed under the UK legislation, but the reinsurance directive will provide for automatic recognition throughout the EEA, as is currently available for direct business. Unlike in schemes for direct business, the reinsurance directive provides that only the member state where the reinsurer is primarily regulated can approve a transfer and the consent of other regulators is not required.

This new legislation requires some amendments to the UK Part VII regime, which are currently the subject of a public consultation. The consultation closes on 17 October 2007, with the changes expected to come into force on 10 December 2007. At the same time, the UK government will implement earlier proposed amendments extending the Part VII regime to pre-1996 Lloyd’s names and making explicit the court’s power to transfer reinsurance assets, regardless of the provisions of the policies.

As part of this implementation of the reinsurance directive, the UK government proposes to introduce a more streamlined Part VII process for certain pure reinsurance transfers, which it terms ‘Part VII-lite’. Such transfers would not require court approval, significantly reducing the expense and time required. All that would be required is a certificate from the transferee’s regulator certifying that the transferee will have the necessary margin of solvency post-transfer.

The consultation document does not go into any detail about what the Part VII lite process would involve or what types of transfer would be subject to it. It does say that court sanction would always be an alternative, even if Part VII lite were available. It seems that the purpose of the proposal is to ensure that, for pure reinsurers, the rules are less prescriptive and can be readily adapted by the FSA to the book of business being transferred and the circumstances of the transfer. This is consistent with a principles-based approach and is to be welcomed.

FSA reports on Part VII transfers

By contrast, a more recent FSA consultation on Part VII transfers seeks to impose greater rigidity on the Part VII process for direct insurance books. The FSA has, in the past, attracted some criticism for not playing a sufficiently active role in the Part VII process. Subsequent discussions between the FSA and the Companies Court have led to the FSA sending a letter to a number of industry professionals proposing that the FSA should prepare a formal report for the court in respect of every Part VII transfer and that in appropriate cases it should appoint Counsel to appear on its behalf at the court hearing. The FSA has been following this process on a trial basis since June 2007.

The suggestion is that, when the FSA is ready to give its approval in principle and before any application is made to court, it will prepare and share with the companies a draft report setting out the following matters:

  • its position as regulator of the companies;
  • the appointment of the independent expert;
  • any necessary consents or certificates from other EEA regulators;
  • the process for notifying policyholders and affected persons;
  • any relevant regulatory history of the companies;
  • any regulatory issues raised by the scheme, whether prudential or regarding management and control or fair treatment of customers;
  • any significant issues around policyholder communication and understanding of the scheme; and
  • whether or not it objects to the scheme.

While this proposal from the FSA responds to a specific concern, and those reports it has produced so far have been welcomed, the requirement that it produce such a report in every case could potentially serve to increase the expense and time required by companies to promote a transfer scheme and also significantly increase the supervisory workload of the FSA.

As things stand, the FSA is entitled to be heard by the court, where it considers it appropriate. In other cases, the companies include any views expressed by the FSA in their witness statements and draw them to the attention of the court at the hearing. Companies’ witness statements already set out in some detail the background to the proposed transfer, the regulatory history of the companies, the position of other EEA regulators, the appointment and views of the independent expert and the process used to notify policyholders and other affected parties. In his report, the independent expert will have addressed questions on the prudential position of the companies and the effect of the scheme on policyholders.

The report could prove to be a useful focal point for collating this information and ensuring that all regulatory boxes have been ticked. If, in uncontroversial cases, it were a straightforward pro forma report that could be produced speedily, it would be a welcome step.

Where the report potentially duplicates detailed work already carried out by the companies and the independent expert, the proposal may cause more difficulty. For example, the communications process in a Part VII transfer is often very complicated. The FSA may not necessarily have sufficient detailed knowledge to produce a report without significant assistance from the companies.

Another proposed change is for policyholders and other affected parties to be invited to make representations on the scheme not only to the companies, as is currently the case, but also to the FSA. The final version of the report filed at court will include a summary of any objections and representations received and considered by the court. The FSA’s current guidance requires that scheme promoters advise the FSA about any material representations made to them in response to the transfer scheme. It is inevitable that a scheme of any size will attract a significant number of representations, many of which will not be material or relate directly to the scheme. It may be problematic for the regulator to process this material itself, rather than relying on the regulated companies to do so and to report any material representations, consistent with a principles-based approach to supervision.

The deadline for responses to the consultation was 15 September 2007 and no doubt the proposals will be refined to ensure that the system ultimately put in place is both effective and proportionate.