FCA emphasises early engagement in new insurance transfer guidance consultation
The FCA has published draft guidance which sets out how it proposes to review transfers of insurance business. It explains the FCA's overall approach when reviewing the proposed transfer, as well as its expectations of the parties and the independent expert (IE) when assessing the nomination of the IE and the report prepared by the IE to the High Court on the terms of the scheme.
Part VII FSMA sets out the statutory mechanism allowing insurers and reinsurers to transfer portfolios of insurance business from one entity to another, subject to court approval. Although the management of the transfer process is led by the Prudential Regulation Authority (PRA); FSMA also gives the FCA an active role in the process, including consultation at all stages and a right to be heard by the court on applications to sanction a Part VII transfer. Both regulators usually provide reports to the court setting out their assessment of the transfer scheme.
Insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that the publication of draft guidance by the FCA was a "very welcome development for insurers and professional advisers". The draft "attempts to codify best practice in this field and clearly distinguishes the FCA's approach from the PRA's one to these popular and versatile restructuring processes, which is to focus more on the conduct risk issues to secure appropriate consumer protection".
This new guidance is intended to be read alongside the existing chapter (SUP 18) in the FCA's Handbook and also the PRA's April 2015 statement of policy setting out its approach to insurance business transfers.
The guidance paper makes it very clear that "[o]ne of the essential ways in which Policyholders' interests are protected within a Part VII Transfer is that each Policyholder is given the opportunity to fully consider the Scheme and its possible impact on them… It is an important quid pro quo for the statutory override of their contractual rights that individual Policyholders have the chance to object to their policies being transferred."
"Applicants will especially welcome this proposed guidance around early engagement with the FCA if it means it will become easier and quicker in practice to arrange kick-off meetings with the regulators and to discuss the policyholder communications strategy and dispensations with the FCA," said Geiringer.
"The guidance should provide insurers with more certainty and consistency, which is important as insurers spend considerable sums on these transfers. Some insurers and advisers have been frustrated in the past by some of the mixed responses to the proposed scheme documentation which have not always focused on the key aspects of a transfer scheme, resulting in comments coming back to them on what has been thought to be on less important matters," he said.
The FCA has said that it "recognises that each Part VII transfer has to be considered on its own merits and circumstances and expects to take a proportionate approach in its assessment", and that it will expect applicants to explain any points of divergence from the guidance where relevant to a particular transfer.
The draft guidance also covers the importance of the initial meeting to engage early at the outset with the FCA on transfer schemes, the preparation of realistic timetables, the appointment of the IE, what it will cover in its reports to court, the areas of interest to the FCA when it reviews the Scheme document and the IE's report and, finally, how the FCA will judge applications for dispensations from the obligations to notify all policyholders and other interested parties.
One "slightly disappointing" aspect of the guidance is that the FCA has not covered friendly society transfers of engagements as part of its guidance, Geiringer said. The PRA's approach to both Part VII transfers and friendly society transfers was codified in the same document two years ago, as there are "a number of similarities in the two processes", he said.
Neither the FCA nor the PRA's guidance on insurance business transfers is legally binding, unlike the statutory provisions and related case law. However, the guidance is important as a Part VII transfer will not receive the court's sanction if the regulators object.
Comments on the guidance consultation are requested to be submitted to the FCA by 15 August 2017.