Proposals by Aviva for the reattribution of its inherited estate were approved by the court in September. The appointment of Clare Spottiswoode as Policyholder Advocate (PA) to represent the interests of policyholders in Aviva’s long-running project has made the process particularly interesting. Ms Spottiswoode has consistently challenged the FSA to defend its approach to the use by life companies of their inherited estates. Her final report to policyholders notes her frustration at being unable to persuade the FSA to change its rules, except to a limited extent in relation to payments of misselling compensation.
In approving Aviva’s reattribution proposals, Norris J did not discuss competing legal advice received by the company and the PA at length. However, his judgment (which was published some weeks after approval was given) contains:
- confirmation that the PA’s primary role is to negotiate the best reattribution terms possible for policyholders. Once this has been achieved, further criticism of the deal that has been agreed or the underlying regulatory regime is not a relevant consideration for the court in deciding whether to approve the scheme;
- an implicit acknowledgement that advice provided to Aviva was to be preferred over advice provided to the PA as a statement of the current legal position on the rights and interests of with-profits policyholders; and
- a warning, perhaps, that opinions expressed by an independent expert (IE) in his report on a transfer of insurance business under Part VII of the Financial Services and Markets Act 2000 (Part VII Scheme) will not necessarily be accepted without question by the court.
Aviva first announced its intention to look at a reattribution of its inherited estate in November 2006. Almost three years later, final proposals were put to the court as part of a programme to rationalise Aviva’s corporate structure, which included a Part VII Scheme to transfer the long term insurance business of a number of Aviva group companies to Aviva Union Life & Pensions Limited.
Norris J’s reasons for approving the Part VII Scheme, including the proposed reattribution, contain the following points of interest.
Role of the court on Part VII Schemes
The role of the court on Part VII Schemes has been considered on many occasions, starting with the unreported decision of Hoffmann J in Re London Life Association Limited (1989). More recently, Evans-Lombe J summarised the position in eight “London Life Principles” (see Re AXA Equity & Law Life Assurance Society plc  1 All ER 1010).
With some modification to reflect the language of FSMA, the London Life Principles establish the following:
- Although the court has an absolute discretion under FSMA whether to approve a Part VII Scheme, it must exercise this discretion by giving due recognition to the commercial judgment that has been entrusted to the company’s directors by its constitution.
- The concern of the court is whether a policyholder, employee or other interested person (or group) will be adversely affected by the transfer.
- Whether this is the case is largely determined by actuarial judgment and involves looking at the security and reasonable expectations of policyholders without the transfer as compared with their position if the transfer took place. The IE’s role is an important one in this regard and the court will give close attention to his report.
- The FSA, as regulator, can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are adversely affected by a proposed transfer. The court will again pay close attention to the FSA’s views.
- The fact that individual policyholders (or groups of policyholders) may be adversely affected by a transfer does not mean it must be rejected by the court. The fundamental question is whether the transfer as a whole is fair as between the interests of the different classes of persons who are affected by it.
- It is not the court’s role to produce what is, in its view, the best possible transfer. It is the directors’ role to choose between different transfers, all of which the court may deem to be fair.
- Similarly, the details of the transfer are not a matter for the court provided that it finds the transfer as a whole to be fair. The court will not, therefore, seek to improve particular aspects of the proposed scheme.
- In reaching a conclusion, the court should first determine the contractual rights and expectations of policyholders before the transfer was promulgated. It should then compare those with the likely effect on the rights and expectations of the policyholders if the transfer takes effect.
Consistent with the London Life Principles, Norris J commented that his role was “in a sense a ‘binary’ one”; he was required to judge whether, in all the circumstances, the scheme proposed by Aviva was as a whole “appropriate”, that is, it was promoted for a proper purpose and operated fairly as between those classes of person whose rights were affected by it.
In particular, the court was not required to satisfy itself that no better scheme could be devised. Nor was it required to assess whether the proposed scheme might be improved by further negotiation.
London Life Principle 8 – Determination of policyholder rights and expectations
One of the most interesting aspects of the Aviva reattribution exercise was the different legal advice that was provided to Aviva and the PA on:
- the rights and expectations of with-profits policyholders in respect of a life company’s inherited estate; and
- the nature and extent of legal constraints on the use to which a life company’s inherited estate might be put.
Advice given to Aviva took what can be described as a more traditional approach, based on such legal and regulatory precedent as exists in this area, for example, the AXA case referred to above. The PA’s legal advice differed in a number of significant respects and, it was argued, was intended to provide an answer to the issues “on a principled basis”. Further, the PA’s legal advisers acknowledged that their analysis had not been tested in court and “differ[ed] markedly” from the approach adopted in the AXA case.
Given the complex questions that have always surrounded the determination of with-profits policyholders’ right and interests in a life company’s long term fund, including any inherited estate, the court’s views on this competing advice were eagerly awaited. However, Norris J did not take the opportunity to comment on the law in this area at length, preferring simply to comment that he was “going to decide this case on the law as it is, rather than the law as Ms Spottiswoode personally would prefer it to be”. It is also significant that the PA’s report did not suggest that the proposed scheme was unfair to policyholders if the Aviva view of the law were correct.
As a statement of the current law, Norris J’s decision suggests that the analysis provided by Aviva’s legal advisers is to be preferred, but probably takes the debate little further.
Role of independent expert on Part VII Schemes
On the role of the IE in providing an objective assessment of a proposed scheme, the judge noted that the court was highly dependent on the IE’s judgment on issues of a highly technical nature. Rejection of that judgment would need to be supported by specialist evidence of equal weight that there was a significant technical error.
In relation to expressions of judgement contained in an IE’s report (that something was “fair”, “reasonable” or “appropriate”), Norris J thought that the court may be more confident in making its own assessment. However, it should remain reluctant to overturn the IE’s opinion, which is “informed by a depth and breadth of specialist knowledge”. There is perhaps a warning in these comments for the future that judgments or opinions expressed by the IE in his report will remain susceptible to examination by the court.
Role of PA on reattribution exercises
Commenting on the role of Clare Spottiswoode as PA in relation to the reattribution exercise, the judge noted that she had, based on the breadth of the terms of reference on which she was appointed, undertaken a review of aspects of with-profits business generally. In doing so, she had formed opinions about practices which have, until now, been regarded as lawful, proper and compliant with the FSA’s requirements. For example, the PA questioned the use of the inherited estate to pay misselling compensation to policyholders (now addressed for the future by a change of FSA rules) and to fund new business (which is still allowed).
The judge concluded that there could be no complaint that the PA had started a public debate about these issues. However, her personal opinions, however well informed, about the current regulatory environment for with-profits policyholders generally and how it should be changed were not a relevant “circumstance” to be taken into account at a sanction hearing.
In reaching this view, the judge set down a clear marker for the future as to the role of the PA, in particular, once negotiations over the terms on which a reattribution should take place have been concluded.
In its first opportunity to do so, the court has stressed that there are limits on the PA’s role in the reattribution process. The PA concludes in her final report that her ability to negotiate on behalf of policyholders was severely constrained by the regulatory system and by the lack of support she received from the FSA. She particularly expresses her disappointment in two aspects of how with-profits business is conducted that she considers to be “contrary to sound principles of economic regulation”, namely:
- the writing of new business on terms that lead to an inter-generational transfer of the benefits of the inherited estate; and
- uses of the inherited estate to meet obligations that would otherwise fall to be met by shareholders, for example, to pay shareholder tax on distributions.
Although we can understand why the court declined to do so, it is disappointing that it did not take this opportunity to bring some clarity to the legal uncertainty that surrounds with-profits policyholders’ rights and interests in the inherited estate. No doubt, therefore, debate on this issue will continue.