Part VII insurance business transfers: The FCA’s approach to review
05 Jun 2017
The Financial Conduct Authority (FCA) has published a guidance consultation paper (CP) GC17/5 outlining its approach to reviewing insurance business transfers under Part VII of the Financial Services and Markets Act 2000. While the Prudential Regulation Authority (PRA) leads the Part VII process, the FCA also has an active role to play, and will assess Part VII transfers based on its operational objectives of protecting consumers, enhancing market integrity and promoting competition. The FCA also has the right to be heard at Court on applications to sanction a Part VII transfer.
This draft guidance aims to help two main parties to better understand the FCA’s approach and requirements, namely insurance companies considering Part VII transfers and the Independent Experts (IE) appointed to report to the Court on the scheme’s terms. The guidance should help firms draft proposals in a way which minimises comments and challenge from the FCA, with the FCA estimating that, by reducing compliance costs and rework, it could reduce the cost of some transactions by £50,000.
Some points to consider from the CP:
Although much of the content of this CP is in line with the FCA’s recent practices and, to a large extent, will already be reflected in the work of experienced IE practitioners, it is welcome that the FCA is looking to consolidate its position in a single document, thereby avoiding unnecessary procedural obstacles. However, it is perhaps slightly concerning that the CP has been issued independently of the PRA. While the FCA’s focus is on policyholder protection and outcomes, in contrast to the PRA’s focus on prudential regulation, we hope that unintended obstacles are not created.
Appointment of the Independent Expert
Although the PRA is responsible for approving or nominating the IE, it must consult the FCA before it does so. While the FCA will naturally consider the independence, skills and experience of the IE, it will also lend a great deal of weight to those of the team supporting the IE, including the peer reviewer. Combined with considering the areas of wider contact that the IE’s firm may have, or have had, with the parties to the transfer, the approval of the IE may now be more difficult than in the past. To ensure no unwanted delays in proceedings, firms may therefore wish to have a reserve IE, possibly from a different firm, on hand.
Evidence of Challenge
When a draft scheme is proposed by a firm, it rarely represents the final position. Through challenge and discussion of various interested parties, including the IE, the design will evolve before being finalised. However, such challenges to the terms of a scheme rarely find their way into IEs’ reports, the rationale being that either a change has been made to the scheme or the IE has become satisfied that the relevant terms are acceptable. The FCA now expects to see a greater degree of disclosure of the challenges that were made to the scheme’s terms, together with clear evidence that the information and calculations provided by the firms have been questioned appropriately.
Reliance on the work of others
Since the IE in an insurance transfer will normally be an actuary, there may be a need to consult other experts in some circumstances, for example in matters of law or taxation. Historically, taking legal advice (or not) has perhaps been based on whether anything “out of the ordinary” or innovative is being proposed and that decision would be based on the IE’s experience. The FCA now expects that, if independent legal advice has not been sought, the IE should set out why that was the case. It therefore seems likely to us that legal advice will now always be required in the future, simply to confirm this point. That said, the FCA has helpfully clarified that it will be acceptable to rely on legal, tax or other professional advice given to the firms where a duty of care has also been extended to the IE by the relevant advisers.
Widening the Scope of the review
Some of the terms of the CP may result in a widening of the scope of IE investigations:
- The FCA may require the IE to consider the impact of the scheme on competition, for example where the businesses being combined may result in a reduction in market participants and influence future product pricing.
- The IE should consider more fully the operational arrangements post-transfer that may affect administration or customer outcomes.
- The IE should also consider the appropriateness of the governance arrangements post-transfer.
Communications with Policyholders
The Part VII legislation sets out the communication requirements surrounding the scheme, so that all affected by it are made aware of its terms and expected impacts, and may make representations if they are dissatisfied with the proposed position. It is common for firms to seek a waiver from some of the communication requirements where full compliance is viewed as being unduly burdensome. Currently, the IE will normally comment on the communications strategy proposed and will consider the documents being sent to ensure that these represent the proposals fairly. The CP indicates that a higher burden of proof will be required before the FCA will accept applications for waivers, noting that the final say in this lies with the Court.
Additionally, the CP sets a challenge to the IE in drafting the scheme report. The FCA expects the scheme report to be more accessible and shorter than recent examples have been, and to be presented in simpler, non-technical language with a reduced level of detail. While we naturally support the FCA’s underlying desire for the report to employ clear, unambiguous language in meeting the needs of its users, we do feel that a drive towards brevity and simplicity could be at odds with the need to provide a technically competent report (subject to expert witness rules and professional actuarial standards) capable of withstanding technical scrutiny in Court. Indeed, the terms of the FCA’s guidance are, in our view, more likely to extend the length of scheme reports rather than shorten them. We believe that the policyholder summary of the scheme report remains the best place to provide a user-friendly analysis of the scheme.
Post-Brexit regulation may alter how some firms have to do business, particularly if they have EU branches or operate under freedom of services. The CP does not address this directly but provides a reminder that other considerations apply to cross-border transfers.
Any comments on the guidance need to be sent to the FCA by its 15 August 2017 deadline. Finalised guidance is planned to be issued in autumn 2017.
Hymans Robertson has a wealth of relevant life insurance experience, including insurance restructuring and M&A support, portfolio transfers and reinsurance. We also have extensive experience of acting as Independent Expert in business transfers and re-organisations. Our experts would be delighted to support you, so please get in touch if you would like more information or advice.
Stephen Makin, Head of Risk and Capital Management - Contact
John McKenzie, Head of Insurance Transfers and Reporting Service - Contact
Lynn Yorkston, Consulting Actuary - Contact