As we reported in our bulletins of 8 December 2016 and 26 January 2017, in late 2016 HM Treasury published a consultation paper containing draft regulations for the Insurance Linked Securities (ILS) framework, and in January 2017 the Insurance Law Committee of the City of London Law Society published its response to the consultation. HM Treasury has recently published its own response to the consultation process.

The latest documents summarise the responses to the consultation process and then deal with the key issues raised in those responses, providing further explanation where required. HM Treasury received 19 responses to the consultation which were technical in nature and it has therefore not described each of the responses.

One of the key elements of the proposed regulations was the introduction of a protected cell company (PCC) regime, in order to ring fence the assets and liabilities of investment cells within private companies in order to comply with Solvency II. Some respondents to the consultation requested that the regulations permit arrangements between cells within a PCC on the basis that such arrangements are permitted in other jurisdictions and are commonly used in the ILS market. In its response, HM Treasury pointed out that a key objective of the UK’s PCC regime was to ensure the segregation of cells within a PCC and that to allow cells to enter into contracts with each other would be contrary to this key objective. However, the government did recognise that in some circumstances arrangements between cells could be useful to market participants and has introduced provisions to facilitate such arrangements into the draft regulations. These provisions provide “gateways” for the movement of assets between cells but are subject to very strict procedural requirements.

Another example of a change made to the regulations is in response to the suggestion that directors of PCCs ought to be subject to an additional duty of care. As a result, HM Treasury has now introduced provisions into the draft regulations requiring directors to (i) exercise reasonable care, skill and diligence to ensure that a PCC complies with the Risk Transformation Regulations and (ii) act in accordance with any enforceable arrangements which are made between cells.

Further changes include:

  • Agreement in principle from the government that ILS shares could be traded on secondary markets, providing that the trading venue was accessible only to qualified investors.
  • Provision for a quicker procedure by which business could be transferred from a cell to another company.

The government also responded to the consultation comments on the tax treatment and authorisation/supervision of PCCs. The entire report is available here and should be read in full for a thorough understanding of the amendments to the regulations.