We are seeing an increasing number of Part VII transfers in the lead-up to Solvency II, making it important for practitioners in this area to track changes in practice and law carefully.

Key points

Recent developments suggest that the court and the FSA may be looking more closely than in the past at how parties to a transfer of insurance business communicate with their policyholders during the Part VII process. This may be because they regard meeting policyholders' needs for information as an important trade-off for asking the court to exercise its wide discretionary powers under Part VII FSMA.

We note, in particular:

  • that the court appears to be taking a more critical approach to applications for policyholder notification waivers than to date; and
  • increased FSA interest in how firms deal with policyholder responses and questions.  

Whatever reason lies behind these developments, firms wishing to avoid delays need to think carefully about their communications strategy at the beginning of the Part VII process. Early engagement with the FSA and advisers will be important.  

Waiver applications - policyholder notifications

It is usual for parties to a Part VII transfer to seek a waiver from the court of the requirement to send notice of the transfer to policyholders, on the basis that it is almost always a practical impossibility for an insurer to be sure that it will reach every policyholder. Instead, the parties ask the court to approve a package of proposals for bringing the scheme to the attention of policyholders. These proposals usually still involve sending individual notifications to some policyholders, while excluding others e.g. because their addresses are only known to a third party who sold the policies on behalf of the insurer. Advertising the scheme more extensively than is required under the relevant legislation may also be appropriate.

Until now, the court has generally been happy to follow the FSA's lead on whether a waiver application should be granted. Recent case law suggests, however, that it may place applications under closer scrutiny than to date and be willing to take a different view from the FSA.

  • In Ecclesiastical Life Ltd v FSA [2010] EWHC 3871 (Ch), Floyd J noted that "... the importance of the notice provisions cannot be underestimated", a comment which perhaps explains the court's increased interest in this area. It would, therefore, be relatively rare for the court to grant a waiver in respect of notification of an entire class of policyholders. This approach is inconsistent with past practice and it would not be helpful if it were followed on future transfers.
  • In Direct Line Insurance plc v FSA [2011] EWCH 1482 (Ch), a number of waivers were applied for at a pre-directions hearing in relation to notifying transferring policyholders under policies issued through a third party. Floyd J refused the applications for lack of evidence about the attitude of the third party, even though he acknowledged that the policyholders may not be particularly concerned about the identity of their insurer.
  • At the same hearing, the parties argued that to notify policyholders of the transferee company would be disproportionate given that their relationship with the transferee would not change as a result of the transfer and over half of the policies were packaged policies (which made it very unlikely that policyholders were aware of, or concerned about, the identity of their insurer). The FSA objected to this application on the grounds that the transferee would triple in size, which meant that its nature would change as a result of the transfer. The judge took a different approach, though, and did not grant the waiver requested in the absence of further information, notably about how the proposed transfer would be advertised. He did, however, approve the waiver at the later directions hearing on the basis of arrangements for wider advertising of the transfer (see Direct Line Insurance PLC and Churchill Insurance Company Limited [2011] EWHC 1667 (Ch)).

In the most recent decision on this issue, Re Aviva International Insurance Limited [2011] EWHC 1901 (Ch), Norris J acknowledged the practical impossibility firms face in meeting the strict notification requirements of the legislation. He thought that the following factors (Aviva Factors) would be relevant to a waiver application:

  • the impossibility of contacting policyholders;
  • the practicality of contacting policyholders;
  • the utility of contacting policyholders;
  • the availability of other information channels through which notice of the application can be made available;
  • the proportionality of strict compliance;
  • the impact of collateral commercial concerns; and
  • the object of the transfer itself and its likely impact on policyholders.

Finally, Norris J confirmed that, as a general rule, the wider the degree of advertisement that can be given to a proposed transfer, the less important it is to see that individual policyholders are notified in strict compliance with the requirements of the legislation.

It is too early to tell whether these decisions will change current practice on schemes, but they have undoubtedly introduced uncertainty into the Part VII FSMA process, which would benefit from clarification. For example, in Direct Line, Floyd J failed to distinguish between transferring and non-transferring policyholders in his judgment, despite the fact that the importance of notification requirements is likely to be different for each. Norris J's comments in the Aviva decision are more helpful, however, in confirming the factors that the court should take into account and in pointing firms towards wider advertising of proposed schemes if they wish to enhance their chances of obtaining a waiver.

From a practical perspective, it is clear that parties to a Part VII transfer must approach their broader communications strategy with more caution than in the past and in a way that takes full account of this line of decisions. Where an application to the court to waive policyholder notification requirements is contemplated, it must be justified by reference to the Aviva Factors. It must also be considered in the context of such broader communications strategy, which should include suitable proposals for ensuring that policyholders are informed of the proposed transfer. Early engagement by the parties to a transfer with their scheme lawyers and independent expert (IE) is clearly important, as are discussions with the FSA to determine its views on the merits of a proposed application.

Parties should also expect to be challenged on waiver applications and need to be ready to justify to the court why a waiver should be granted and how alternative proposals can be expected to meet the court's concerns.

Waiver applications – who decides?

It is perhaps surprising that the decisions referred to above were all made by a judge because waiver applications in respect of notification requirements are usually heard before a registrar at the directions hearing. However, a judge may be appointed to hear more difficult applications, such as those that involve a point of law or are opposed by the FSA.

It is also notable that Floyd J's first Direct Line ruling was made at a pre-directions hearing. The court confirmed in Re Names at Lloyd's for the 1992 and prior years of account [2008] EWHC 2960 (Ch) that it has jurisdiction to decide applications before the directions hearing takes place, including before the IE's report has been filed. Its willingness to make a ruling at this earlier stage is likely to depend on whether the IE's evidence might have a bearing on its decision.

Both practices are helpful if parties wish to obtain early relief from the strict requirements of the Part VII legislation in circumstances that are other than straightforward.

Increased FSA scrutiny of policyholder responses

Another area of change over recent years on Part VII transfers relates to the FSA's involvement in policyholder responses and, in particular, to the amount of information that it seeks from firms. Past practice has tended to be for the FSA to review comments in draft witness statements about policyholder responses.

Increasingly, however, the FSA seems to require firms to provide detailed statistical and other information on policyholder responses to it and the IE, in some cases updated on a weekly basis. Information may include numbers of responses overall and how those responses break down by reference to various categories. For example, parties may be asked to divide responses by type of policyholder (e.g. transferring; non-transferring; policy held) or by nature of response (e.g. asking for clarification; expressing dissatisfaction; specific area of objection; intention to appear at court hearing). The FSA and the IE may also ask to see a copy of correspondence with objecting or otherwise dissatisfied policyholders and want to know how long firms are taking to reply to policyholders.

On a large transfer, involving millions of policyholders, meeting the FSA's demands may be extremely onerous for firms. Early planning of Part VII projects should anticipate this level of engagement with the FSA on responses and the amount of resource that will be required to meet FSA demands.

Increased scrutiny of policyholder responses is consistent with the courts' focus on policyholder communications. Both may reflect a concern to ensure that policyholders are treated fairly and that they receive the information they need to understand the consequences for them of a transfer of business, consistent with the FSA's Principles for Businesses. Whatever the reason, both trends must be reflected in how parties prepare for the Part VII process and how they resource their teams.