Earlier this week, the FCA published finalised guidance on its approach to the review of insurance business transfers under Part VII of the Financial Services and Markets Act 2000 (FSMA) (FG18/4) (Guidance Paper). The FCA consulted on a draft version of the guidance in May 2017 (GC17/5).
The Guidance Paper has been much anticipated and the further clarifications given by the FCA are welcomed by the industry.
The FCA has also provided feedback on the proposed guidance and notes that overall respondents were supportive of the proposed guidance and welcomed the FCA clarifying its approach to reviewing Part VII transfers. The FCA has aimed at addressing many of the concerns raised and we set out below a summary of the key differences between the original draft version and the final Guidance Paper published this week:
- Application of the guidance: The FCA has amended the introductory statement to clarify that the purpose of the guidance is to help firms identify areas of the transaction that differ from the expectations and examples covered in the guidance early in the process and therefore to avoid delays closer to the court dates.
- The competition role of the Independent Expert (IE): To address the concern that the IE is usually an actuarial specialist and so would not necessarily have the expertise to comment on competition matters, the FCA has clarified its expectations of the IE. The FCA does not expect IEs to be competition specialists, but it does expect them to highlight if there are competition-related matters which could affect policyholders. The FCA gives examples such as: where the transfer is in a niche area and might restrict policyholders’ future choice of providers; and if for example, there are clauses in the scheme documents that have the effect of reducing competition between firms in the future, for example a clause restricting the transferor from targeting promotions to the transferred policyholders.
- COBS 20: The guidance on COBS 20 has only been clarified but the FCA’s position is unchanged. The FCA recognises that firms take the view that they are able to rely on COBS 20 transitional provisions but the FCA’s position is that, in many cases, firms will need to consider applying for a waiver to achieve the outcome they want.
- Materiality: The FCA has clarified the guidance to explain that, while IEs sometimes provide definitions of materiality in their reports, it is not an FCA requirement for them to do this. The FCA has included a description of what it would consider when reviewing the appropriateness of these definitions.
- Excluded policies: The FCA has updated the section on excluded policies and included examples of Scheme wording on transferring business and transferring liabilities including providing further clarity and examples of its expectations for third-party and intra-group transfers.
- Changes to the Scheme: The FCA has amended sections on future changes to the Scheme and what types of changes would trigger the requirements, the expectations on the IE and the scope of their work and the FCA’s notice period to consider proposed changes. The FCA has also noted that it would like to see provisions which prompt firms to apply for a change to the Scheme where there have been “unintended impact(s)” on policyholders, assessed by reference to what was communicated to them in the policyholder notification. The FCA has stated that such provision is likely to be particularly helpful in the context of Brexit transfers. The addition of such provision should be approached with care – ironically its inclusion in the Scheme could have unintended consequences itself given the vagueness of the clause when combined with the inflexible requirement to have to go back to court if it is deemed triggered.
- Renotification: The draft guidance referred to a delay of two months to the Scheme effective date being likely to cause a need for renotification. Industry practice is three months as a starting point to consider whether renotification is required and appropriate and the FCA has amended this section. The FCA has also re-stated its view that the merits of each case should be taken into account by the applicants and would be taken into account by the FCA together with proportionality considerations when deciding whether a re-notification of policyholders is required.
- Ancillary orders: The FCA has added an example in the section on ancillary orders and the circumstances that would cause it to consider objecting to requests to change the Scheme involving the Court exercising its powers.
- Post-Brexit regulatory protections: The FCA has expanded the guidance on its expectations for the analysis of regulatory protections post-transfer and how these might be met following Brexit. The FCA has added detail around the scope of the regulatory regime comparison that it expects for transfers with cross-border elements. This includes whether there is continued access to the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS). The FCA’s expectation is that applicants aim to preserve FOS, whether under the Compulsory or Voluntary jurisdictions, as far as it is possible to do to avoid any loss of protections. In the context of EU withdrawal, the FCA would expect this at least until the point of policy renewal. Some firms are able to continue to service contracts from UK branches to preserve continuity. Post Brexit, non-UK EEA customers may be subject to the local conduct of business rules regime, which may not include FOS or FSCS issues. In these cases, the FCA is likely to accept firms taking proportionate approaches to compare regimes.
- IE reliance on other experts: The FCA has expanded the section on the IE’s reliance on the work of other experts and its expectations for the legal advice regarding non-EEA courts recognising the transfer. It has also clarified when and what kind of advice it would seek to review.
- Defintion of 'policyholder': The FCA has stated that ‘it is not necessary’ for it to accept the arguments put forward by respondents given the uncertainty of the scope of the definition of policyholder. Instead, where appropriate, the FCA is open to firms applying for dispensations that would achieve the same outcome.
- Broker co-operation: Where brokers refuse to assist with the communications exercise, respondents were concerned that the FCA would expect firms to enforce contractual obligations or in some circumstances even ask the Court to make an order forcing the brokers to assist with the policyholder notifications. The FCA’s expectation is that brokers and other authorised third-parties should help facilitate the notification process in light of the FCA’s Principles of Business (Principles 3 and 7). However for the FCA to consider a dispensation application, the applicants would need to demonstrate that they have considered all reasonable options for engaging the brokers in the notifications exercise.
- Communications plans: The guidance has been clarified to reflect that the FCA is willing to consider communications plans with proposals for postal and/or digital notifications as well as the combination and scope of the documents included. Its expectation is that applicants should set out why the chosen format and delivery method of the policyholder packs is appropriate for the specific transfer, considering policyholder profile, complexities of the Scheme and other relevant factors.