HM Treasury has published a consultation paper1 which contains draft legislation for the government’s proposed insurance linked securities (ILS) framework for the UK and addresses the proposed corporate, tax and regulatory aspects of the regime.
We had previously reported, in our Bulletin of 20 November 20152, that the House of Lords had considered legislation to give HM Treasury power to make regulations for creating and regulating structures for ILS business. These regulations follow HM Treasury’s initial consultation in March this year, in which HM Treasury consulted on overall approach to the ILS framework.
HM Treasury’s proposed regulations would introduce a protected cell company (PCC) regime in the UK to cater for multi-arrangement insurance special purpose vehicles, i.e. insurance special purpose vehicles (ISPVs) which take on multiple contracts for risk transfer. UK PCCs would be private companies limited by shares and would comprise the cells (to which assets and liabilities would be assigned) and the core (the administrative function, which would manage the cells and enter into transactions on behalf of the cells). The proposals regarding UK PCCs have been designed to meet Solvency II requirements by ensuring that the assets and liabilities of each cell of the PCC are ring-fenced.
Prior to the publication of the consultation paper, concern had been expressed as to how the UK’s ILS framework could compete with existing low tax ILS domiciles. The draft regulations address these concerns by outlining a bespoke tax regime for ILS in the UK, which the consultation paper expressly states is “not [designed] to create an opportunity for aggressive tax planning or tax avoidance”.
However, the regulations do contain a change from HM Treasury’s initial consultation, which had suggested that a withholding tax might be imposed at the level of the ISPV. The regulations would grant a complete withholding tax exemption for foreign investors but would tax UK investors as normal according to their facts and circumstance. The rationale behind this seems to be that the government believed that imposing withholding tax would make the UK less competitive than jurisdictions where ISPVs are already established.
The PRA and FCA have also published a joint consultation paper3 alongside HM Treasury’s draft regulations, which focusses on the authorisation and supervision of PCCs. The PRA and FCA consultation paper contains a supervisory statement issued by both the PRA and FCA and sets out the proposed amendments to the PRA Rulebook and draft application forms for ISPVs wishing to become authorised.
The deadline for responses to HM Treasury’s consultation paper is 18 January 2017. The deadline for the PRA and FCA’s consultation paper is 23 February 2017. The government has expressed an intention to place the draft regulations (as amended following the consultation) before Parliament early in 2017 but its ability to do this will depend on the response to this latest consultation.