Earlier this week, the FCA published a guidance consultation on its proposed approach to reviewing insurance business transfers schemes under Part VII of the Financial Services and Markets Act 2000 (FSMA) (the Guidance Consultation). The FCA explains in the Guidance Consultation that, while the PRA leads the Part VII process, the FCA also has an active role - in particular, under section 110 of FSMA, the FCA is entitled to be heard on an application to sanction a Part VII transfer. In practice, the FCA is instrumental in reviewing and approving the form of a Part VII transfer and the associated documentation.

The proposed guidance sets out the FCA’s key considerations and general expectations when reviewing a Part VII transfer and is open for comments until 15 August 2017. It represents a helpful development in practice in this area and should be well‑received by both insurers and practitioners. At a time when more Part VII transfers are contemplated than ever, any help that the regulator can give to smooth the process is welcomed. How the FCA seeks to apply the guidance, however, will need to be properly road‑tested.


The FCA states that it expects firms to read the guidance together with its guidance in chapter 18 of the Supervision manual in the FCA Handbook. It also recommends that applicants read the PRA policy statement on insurance business transfers at Appendix 2 to its Rulebook (PS7/15). The guidance is split into the following sections:

  • Chapter 2: sets out initial considerations for firms prior to contacting the FCA and what they will need to produce for any pre-application meeting;
  • Chapter 3: details the documents that the FCA expects to receive and consider regarding the nomination and approval of the independent expert;
  • Chapter 4: sets out the FCA’s overall approach, expectations and key considerations when reviewing the proposed transfer;
  • Chapters 5 to 7: provide detailed information and examples of the key documentation, including the scheme document, the independent expert's report and the communications strategy; and
  • Chapter 8: sets out examples and factors for applicants to consider if firms proposing a Part VII transfer intend to make any applications for dispensations from the requirements in the Financial Services and Markets Act 2000 (Control of Business Transfers) (Requirements on Applicants) Regulations 2001 (SI 2001/3625) (Business Transfer Regulations).

The FCA makes it clear that the draft guidance does not aim to explain all aspects of its role in the process or all issues that firms may need to consider as there are many variations within each transfer. The FCA states that it will not always insist that the approach set out in the guidance is taken on a particular transfer, however applicants will need to explain their divergence with the guidance where it is relevant to a particular Part VII transfer. The proposed draft guidance, in certain areas, requires firms to go beyond what is required by FSMA (considered further below).

Whilst the FCA recognises that each Part VII transfer has to be considered on its own merits and circumstances, and that it expects to take a proportionate approach in its assessment of a Part VII transfer, the guidance is not restricted to those aspects of proposed schemes directly relating to the areas for which the FCA has specific responsibility.

Draft guidance

Initial considerations

The draft guidance stresses the importance of firms contemplating a Part VII transfer to contact both the PRA and FCA as early as possible, to allow the regulators to allocate resources accordingly. The Memorandum of Understanding between the FCA and PRA indicates that the PRA will lead the Part VII process, and whilst this is restated in the draft guidance (that the FCA recognises that the PRA leads the Part VII process and is responsible for specific regulatory functions such as providing certificates), the draft guidance highlights the FCA’s own “active role in the process”. It is clear from the guidance that a more joint approach between the FCA and the PRA is proposed in future. Both regulators need to agree to a firm’s Part VII timetable and to the extent that there are any changes to this timetable, these will need to be agreed to by both the PRA and FCA.

The FCA states that it may require a minimum of 6 – 8 weeks to review documents and that late submission could result in a delay to planned hearings. This is potentially longer than the 6 weeks currently required by the PRA although in practice a safety buffer is often incorporated into transfer timetables.

Review of the appointment of the independent expert

Whilst the PRA remains responsible for approving and nominating the independent expert, it is required to consult the FCA before doing so. The draft guidance sets out the factors that the FCA will consider when determining whether the independent expert is able to demonstrate independence and that s/he has “sufficient skill, experience and resources”.

The FCA will consider a number of factors including (but not limited to):

  • how many insurance business transfers the independent expert or their employer has reviewed for the applicant and how recently;
  • any work the independent expert has done for the applicant;
  • any connections between the independent expert and the applicant;
  • conflicts of interest;
  • any non-standard fee arrangements;
  • specific examples of relevant experience, especially potential conduct risk issues from a particular transaction;
  • statements that the independent expert will be able to allocate sufficient resource, including as part of a wider team, to consider all relevant conduct issues adequately and assess their materiality, collect relevant information, complete the independent expert report, and provide necessary updates in the agreed time frame. This requirement goes beyond what is currently required from the independent expert report; and
  • performance on previous Part VII transfers.

If the FCA and the PRA do not agree on a firm’s independent expert nomination, firms should have in place an alternative candidate. This is often addressed by firms running an RFP or other tender process in order to help identify a suitable independent expert. Firms will be keen to ensure, however, that the IE selection process does not become unduly drawn out or that otherwise suitable candidates are not eliminated by “foot fault” issues perceived in relation to independence. Especially for larger more complex transfers, there is a danger that the pool of available and qualified IEs becomes increasingly small.

Overview of the FCA’s approach

The FCA expects to file reports at Court, setting out its views or comments on the transfer, to help the Court in its consideration of the Scheme. Occasionally, it may also be necessary for the FCA to file supplementary reports or letters on top of the two Court reports it would usually file. The draft guidance sets out further detail on the matters the FCA will consider and comment on, both to firms and in the body of the FCA’s report to the Court. These include:

  1. Link to the FCA objectives – The FCA’s approach to assessing Part VII transfers is based on its statutory objectives and Annex 1 to the guidelines consultation includes a high-level description of the FCA’s approach.
  2. Business rationale for the Scheme – Applicants have to clearly explain the reasons for the proposed transfer and the FCA will consider whether the reasons are “genuine and plausible”. The FCA also needs to see the transfer in the context of any other proposed transfers in the group or any other significant transactions which are part of a re-organisation.
  3. Background regulatory issues – The FCA will consider whether there are background regulatory issues relating to the applicants that may be of interest to the Court, such as unresolved enforcement proceedings against the transferee.
  4. Competition considerations – One of the FCA’s statutory duties is to promote competition. Accordingly, the FCA will assess whether the applicants and the independent expert have considered whether there may be an adverse impact on effective competition in the interests of consumers or other competition issues. This express requirement on the applicant and independent expert goes beyond what is currently required under the Part VII legislative framework.
  5. Changes affecting policyholders – The FCA expects applicants and the independent expert to demonstrate that they have adequately considered what may be changing and have sufficiently analysed how, and to what extent, there may be an adverse impact on policyholders.
  6. On-going regulatory requirements – The FCA will consider the transfer in light of the applicants’ ongoing regulatory obligations including for example continuing compliance with COBS 20 where there is a with-profits fund. Where applicants argue that there is no material adverse impact, the FCA makes it clear that they should not overly rely on the fact that the transferee is subject to the same regulatory regime. The FCA expects firms to demonstrate that there is/will be no material adverse impact.
  7. Objections – The FCA will consider policyholder objections in detail, including the applicants’ and independent expert’s response to objections. The FCA may ask for the independent expert’s opinion on specific objections.
  8. Unresolved issues – The FCA may refer to any issues which they do not consider fully resolved in their report to the Court.

The scheme document

The FCA notes that it has a particular interest in the following parts of the Scheme document and gives examples of provisions where it has raised concerns and how these have been resolved:

  1. Clarity on business and liabilities being transferred – The FCA states that the language in the scheme document should leave no uncertainty about the possible liabilities being transferred. The business being transferred must be clearly defined and identifiable. The independent expert must be fully aware of the nature and extent of the transferring liabilities (including for example any mis-selling liabilities) and take account of these in their assessment of the scheme. The draft guidance specifies examples of circumstances where specific provisions must be included in the Scheme document however there is a risk that in providing these examples, applicants might include the examples in the Scheme with the risk of adding complexity to the Scheme.
  2. Continuity of proceedings – The FCA expects to see a standard clause included in the Scheme document where in circumstances where all proceedings which are in train, pending, threatened or in contemplation will continue against the Transferee.
  3. Changes to the Scheme – the FCA expects to be notified where changes are made to the Scheme that may require court approval. The FCA asks to be given “ideally 28 days” to object although this time frame is not found in statute. Upon notification, the FCA will consider whether the change is minor or technical, or is ‘required’ by law or regulation and allows no discretion as to how it is effected. In these instances the FCA will consider whether it is likely to have had any impact on a policyholder’s decision of whether or not to object to the Scheme, had they been informed at the time the FCA were considering the Scheme. The FCA will raise objections if it is not satisfied.
  4. Changes to the ‘effective date’ of the Scheme – The FCA expects that changes to the effective date of the Scheme clauses should only be used in “exceptional circumstances and only after all other options have been explored".

Review of the form of the independent expert's report

The PRA is responsible for approving the form of the independent expert’s report, however it must consult the FCA before doing so. The draft guidance states that the FCA’s review will not be limited to a high-level check of whether the report covers the appropriate topics, but that it also aims to ensure that there has been sufficiently detailed analysis and challenge of the applicants’ position, to allow the FCA to be satisfied that it would be appropriate for the Court to rely on the conclusions made by the independent expert. The FCA will review the independent expert report from the perspective of the policyholder (so far as possible).

The FCA considers that often, independent expert reports lack detailed analysis, critical review or reasoning to support the conclusion that there is likely to be no material adverse effect of policyholder groups. Accordingly the FCA sets out its requirements of the independent expert, which will significantly increase the burden on the independent expert. The FCA also states that it sometimes sees an imbalance between factual description and supporting analysis. Accordingly, the FCA sets out its expectations and gives examples of the things it will consider when reviewing the independent expert’s report. These include:

  1. the level of reliance on the applicants assessments and assertions;
  2. sufficient comparative regulatory framework analysis;
  3. balanced judgements and sufficient reasoning;
  4. sufficient regard to relevant considerations affecting Policyholders;
  5. commercially sensitive or confidential information;
  6. the level of reliance placed on the work of other experts;
  7. examples of over-reliance on the work of other experts;
  8. ambiguous language or a lack of clarity;
  9. demonstrating challenge; and
  10. technical actuarial guidance.

Review of the communications strategy

The FCA expects IEs to include consideration of the proposed communications strategy and any supporting requests for dispensations from the Business Transfer Regulations in their report. The FCA now also expects to see evidence that the independent expert has challenged proposed communications that are not clear and fair and do not adequately explain the transfer and the potential impacts on policyholders and how these have been addressed.

The draft guidance notes that the communications form a large part of the FCA’s overall conduct consideration and accordingly the FCA sets out its expectations relating to the following areas:

  1. The definition of policyholder – When considering who is to be notified and which groups of policyholders dispensations are being requested for, one common issue is the wide scope of the definition of “policyholder” under FSMA. The FCA currently takes the view that the definition is very broad and includes for example, beneficiaries under a trust where a policy is taken out by a pension trustee, or employees under an employer’s liability policy or pension scheme. Where applicants take a different view on the definition of “policyholder”, they often use a dispensation and the FCA welcomes applicants using dispensations to take a different view to the definition of “policyholder” under FSMA. The FCA, in many cases, has not objected to these dispensations provided that relevant reasons and supporting evidence has been provided.
  2. Identifying and tracing policyholders and other relevant persons – The FCA expects applicants to set out, in sufficient detail within the Scheme document and witness statements, the various classes of policyholders and other persons caught by the definition of policyholder before the application of any dispensations. Applicants should be able to confirm and demonstrate to the FCA, subject to dispensation applications, that they have made all reasonable efforts to identify, trace and contact policyholders and other relevant persons.
  3. Content of communications – The FCA is interested to ensure that applicants’ communications (including the formal Legal Notice required by the Business Transfer Regulations, the individual policyholder communications, website material and any advertising) are clear, fair and not misleading. The FCA provides guidance relating to the content of the communications made to policyholders.
  4. Individual notifications – The FCA’s review of the notifications will include the tone, content, clarity and conciseness of the literature. The FCA expects policyholder notifications to be transparent, balanced and not misleading.
  5. Including sufficient information with sufficient prominence – The draft guidance requires all the communications give prominence to any aspect of the applicants service which may be changing or where there are particular risks to policyholders as a result of the transfer. Any communications sent to policyholders should include:
    1. the independent expert’s report summary;
    2. a supporting document such as a Q&A or FAQ which gives further details and issues for note by policyholders;
    3. a summary of the terms of the Scheme itself; and
    4. a description of the effect of the main provisions.
  6. Document translation – The FCA expects, as a minimum, that individual notifications and attachments should be in the appropriate language for their audience. Where proportionate the FCA also expects that policyholders can get other documents, on request, such as the full independent expert report and Scheme document, in the appropriate language.
  7. The need for further communications before the Sanctions Hearing – The FCA expects a Supplementary Report to be produced on all transfers, whether or not there are any changes to the Scheme or to the independent expert’s conclusions. This Supplementary Report should reiterate the main points of the original independent expert report as well as confirming or updating the independent expert’s conclusions.
  8. Deficiencies in notifications – If the FCA considers the number of returned notifications is significantly higher than anticipated, then this may reveal more systemic issues with the notification process. These issues may be grounds for the FCA to request that the Sanctions Hearing is postponed and request that a re-notification exercise is undertaken.

Applications for dispensation for the Business Transfer Regulations

The FCA recognises that there will be occasions where applicants are unable or unwilling to notify everyone who falls under the definition of policyholder. In practice, every Part VII is subject to some form of dispensation request. The draft guidance sets out how the FCA will judge whether to object to an application to the Court for dispensation from the Business Transfer Regulations.

The draft guidance notes that where applicants seek dispensation on the basis of the costs of notification or advertising, the FCA will expect to see reasonable estimates of the costs of notification and will challenge applicants if the FCA believes that applicants have not shown enough effort to estimate these costs.

Re Aviva International Insurance Limited [2011] EWHC 1901 (Ch.) is often used as the starting point for dispensations and the FCA notes that it will challenge applicants’ proposals where they have not taken into account the factors set out in the judgment, namely:

  • the ability to contact policyholders;
  • the practicality of contacting policyholder;
  • how useful the information would be to policyholders;
  • the cost to the firm of contacting policyholders and whether it is proportionate; and
  • the availability of other information channels to publish notifications more widely than the Business Transfer Regulations require.

Next steps

The consultation closes on 15 August 2017 and the FCA intends to issue finalised guidance in autumn 2017.