In our November briefing, we reported on proposals recently made by the FSA to increase and formalise its role on transfers of insurance business under Part VII of the Financial Services andMarkets Act 2000 (Part VII Transfers), specifically by preparing a report (Report) to the Court which decides on the transfer.
On 20 November 2007, the FSA held a “round table” discussion (Round Table) to which representatives of law firms, barristers and actuarial firms closely involved in Part VII Transfers, together with some corporate clients and members of the judiciary, were invited to help the FSA develop its thinking. In advance of the Round Table the FSA had distributed to the attendees a summary of the responses received to the earlier letter containing its proposals.
This article contains an interimupdate following the Round Table. Further feedback fromthe FSA, starting with the minutes of the Round Table, is awaited. The length of time the FSA has taken to publish theminutesmay indicate a shortage of resource at the FSA or debate amongst FSA personnel on the approach which it should take in the light of the responses and the Round Table. It is to be hoped that it is the latter, and that this debate will lead to a change in direction so as to reduce the burdens which would otherwise result froma heavy-handed FSA Report process. Summary of responses
The summary of responses indicated thatmany of the consultees had expressed concerns similar to those we had expressed and which were reported in our November briefing. However, at least as set out in the summary, the messages were not so unanimous that it could be said to be obvious what shape the FSA’s developed proposal will take.
The various themes emerging fromthe summary of responses were the following:
- A number of responses queried the need for a Report in all cases, feeling that there would be somemore straightforward cases in which no regulatory complexities arose and no Report would be necessary. Other consultees, like Herbert Smith, were content to see a Report in each case (the difficulty, of course, is to identify in advance which cases do and which do not require a Report), but queried whether the Report needed to be as long or detailed as the FSA envisaged or whether it needed to repeat somuch of what is already covered in the applicants’ own evidence.
- Specific concerns were raised by a number of respondents in relation to the timetable implications of an overly long or repetitive Report (and in this regard Herbert Smith’s experience of the production of a Report by the FSA in a recent Part VII Transfer on which we advised was not at all encouraging).
- Concerns were raised as to the practicality and timing implications of expecting (even if not requiring) objections to be copied to the FSA.
- In relation to the question whether the Report should be made available to policyholders, and if so in what format and when, there were a range of views – some felt it was unnecessary for policyholders to see the provisional or draft report prepared at the initial hearing stage, while some felt it could bemade available either in summary formor via a website link alongside the applicants’ own notification to policyholders.
The Round Table itself was helpful in part. In retrospect, it is a shame the key judicial contribution came only at the end of the session when, almost as an afterthought, Richards J (who, as David Richards QC, acted onmany Part VII Transfers and equivalent transfers under the predecessor legislation, including some of themost ground-breaking) said that the Court is not looking for boilerplate or a boxticking exercise in relation to themyriad necessary notifications and certificates. It is instead looking for the “guts of the thing” – if there are no issues, a single page Report will suffice. On the assumption that the same view would be taken by all the relevant judges, it is a cause of regret that this judicial thinking does not appear to have beenmade clear to the FSA previously, or, ifmade clear, had not been heeded.
It is, after all, in order to address the requirements of the Court that the FSA hasmade its proposals. It will be very interesting to see how this sentiment is reflected in the FSA’s developed proposals.
Other messages coming fromthe Round Table included the following.
Commercial objectives of proposed transfer
The first issue discussed was not strictly one which arose on the Report itself but was, it appears, something which the FSA had been grappling with, namely the extent to which the commercial background to the Part VII Transfer should bemade clear to the Court.Whilst it might seem obvious that reasonably full details should be given to the Court, the reality is that applicants will be reluctant to reveal too much commercially sensitive information if they can avoid it. Relevant precedent case law also provides some support for the proposition that the commercial judgement as to whether to put forward a Part VII Transfer is one for the directors of the relevant companies, rather than the Court, and certainly not one for objecting policyholders to take issue with (see for example the judgment of Hoffman J re London Life , unreported).
Themost sensitive commercial issue which it appeared the FSA had encountered related to the extent to which a Part VII Transfer was used to put business in run-off into a company fromwhich it could be the subject of a proposal for a compromise scheme under section 425 of the Companies Act 1985. The general consensus was that some details should be given of the commercial objectives, particularly where the applicants do indeed have the intention of following the transfer with a series of steps which are entirely within the hands of the applicants (without further FSA or Court scrutiny). However, it was agreed that inmost cases this would not be amatter for the Report itself (unless, perhaps,material policyholder protection issues arise) butmore amatter for witness statement evidence given by the applicants.
In this context, Richards J reminded the attendees that the “ex parte” nature of the hearing on a Part VII Transfer, at which those affected will not necessarily be present or represented,means that there is a duty on the applicants to disclose all relevant matters, and if the Court is asked to approve a transfer but is given no reasons as to why it is being put forward, it will naturally question what the commercial rationale is.
Requirement for a Report in all cases
On the subject of whether a Report should be required in all cases, the discussionmirrored themixed responses to the consultation (see above). It seems unlikely, on the basis of this discussion, that the FSA will agree to dispensewith a Report in certain cases, although it is to be hoped they will agree to bemore flexible about its contents. Herbert Smith queried whether it is really strictly necessary to have the Report at the directions hearing stage in all cases; if there are no substantive issues then it ought to be possible to defer its production until shortly before the final Court hearing. Roles of FSA and independent expert
In the context of a discussion about the respective roles of the independent expert’s report and the FSA’s Report, therewas a general consensus that the role of the independent expert did not need changing to accommodate the Report. The role of the FSA’s Reportwas seenmore as a judgemental one, particularly in the context of the FSA’s statutory duties.
Circulation of Report to policyholders
On whether the Report should be sent to policyholders, the consensus was that there is no benefit in having a standard practice of doing so, but whether it would be appropriate to put it on a website would depend on what was in the Report.
Dealing with objections
As regards the receipt of objections by the FSA, as well as the applicants, the FSA expressed a concern if the only way they would know about objections was via analysis undertaken by the applicants. The reality, however, of course, is that it is the applicants who are best placed, having been given appropriate guidance by those advising themas to their responsibility to the Court, to categorise objections into those which are relevant to the Court application or otherwise raise regulatory issues, and those which are eithermisguided or, however justified in themselves, are not strictly relevant to the application. The FSA is neither sufficiently resourced to do this nor is the FSA necessarily likely to have the full context, in particular in cases where an objection to a Part VII Transfer is the latest in a long line of correspondence between an applicant and a particular policyholder.
The FSA’s developed proposal in this regard is keenly awaited as it has perhaps the greatest potential to change the process which has operated, in general without difficulty, to date.