Part VII of the Financial Services and Markets Act 2000 (FSMA) sets out a statutory regime for effecting transfers of insurance business. Following a consultation paper published in November 2006 by HM Treasury and reported on in the March 2007 issue (No. 63) of the Kendall Freeman Insurance Review, a number of statutory amendments to the Part VII regime have been implemented which affect the powers of the court and the procedural requirements on applicants. These amendments were implemented by three statutory instruments which came into force on 30 June 2008.
Power to Transfer Reinsurance Protections
Prior to amendment, Part VII of FSMA did not make express provision for any accompanying transfer of reinsurance protections alongside a Part VII transfer of the insurance liabilities to which they relate. Part VII has now been amended to clarify that the court does have the power to transfer such contracts, even where provisions within the contract seek to prohibit their transfer or where prior consent of the reinsurer to the transfer is a requirement.
Notification of Reinsurers
An additional requirement has now been imposed on proponents of a transfer to give notice of the application to all reinsurers, or persons acting on their behalf, whose contracts of reinsurance are proposed to be transferred as part of the Part VII process.
HM Treasury recognised that reinsurers stand alongside policyholders as being amongst those most likely to be affected by a transfer of business and considered that this amendment was necessary to ensure that reinsurers were able to exercise their right under the Part VII regime to make representations to the court if they believe that they would be adversely affected by the transfer.
Section 323 of FSMA extends the Part VII regime to transfers of insurance business of underwriting members and former underwriting members of Lloyd’s. Prior to amendment, the definition of “former underwriting member” did not include those who ceased to be underwriting members before 24 December 1996. This has now been amended to enable Part VII to apply to transfers of all insurance business whenever written in the Lloyd’s market. HM Treasury concluded that the distinction between current and former members was not relevant to the application of Part VII of FSMA and that the date of a former member’s resignation should not be a factor in determining whether a transfer of that member’s business is possible. Without amendment, Equitas, the run-off reinsurer of 1992 and prior years non-life business at Lloyd’s, would not have open to it the same options for a restructuring of its business as other insurers.
Implementation of the Reinsurance Directive
The UK implemented the final changes necessary to pass the European Union’s Directive on Reinsurance (Directive) into English law by three statutory instruments, all of which came into force on 10 December 2007. As reported in the December 2007 issue (No. 65) of the Kendall Freeman Insurance Review, HM Treasury consulted on changes to the Part VII regime as a result of the implementation of the Directive. The changes proposed, which we previously outlined, were implemented without substantial change.
Financial Services Authority
Since 1 April 2008, the Financial Services Authority (FSA) has levied fees for Part VII transfers; £18,500 for life insurers and £10,000 for non-life insurers. The fee is payable by the transferor on or before the application to the FSA for approval of the independent expert.
The FSA has also implemented a non-statutory change to the Part VII procedure. The FSA now issues two reports to the court on a Part VII transfer, the first in advance of the Directions Hearing and a further report in advance of the Final Hearing. Previously, only one report was provided by the FSA, in advance of the Final Hearing. The purpose of the reports is to provide the court with information on the FSA’s position in relation to the proposed Part VII transfer, in particular, the basis on which the FSA does or does not object to the proposed transfer going ahead.