Insurance business transfers: ruling shapes law on court's role

Hammad Akhtar, Nick Bradley and Charlotte English were commenting after the Court of Appeal allowed an appeal against a High Court judge's earlier refusal to sanction a so-called 'Part VII' transfer between The Prudential  Assurance Company Limited (PAC) and Rothesay Life Plc. Pinsent Masons acted for certain policyholders, who had objected to the Part VII transfer in the High Court, in the appeal.

Part VII of the Financial Services and Markets Act (FSMA) in the UK sets out the statutory mechanism allowing insurers and reinsurers to transfer portfolios of insurance business from one entity to another, subject to court approval. Management of the transfer process is led by the Prudential Regulation Authority (PRA), although the Financial Conduct Authority (FCA) also plays an active role in the process. Both regulators usually provide reports to the court setting out their assessment of the transfer, along with a report from an independent expert.

Neither the PRA nor FCA objected to the proposed transfer in this case, while an independent expert concluded that there would be no material adverse effects on policyholders. However, approximately 1,000 policyholders objected to the transfer, notably on the grounds that they had selected PAC as their annuity provider based on its long history as a leading insurer, its size and its reputation in the market.

Citing the policyholders' concerns, and determining that there would be a material disparity between the non-contractual, external financial support potentially available for each of the two companies in the event that they would encounter financial trouble, the High Court judge refused to sanction the transfer, citing in total six reasons for the refusal.

However, the Court of Appeal has now ordered the High Court to hear a fresh application for sanctioning the proposed transfer of insurance business between PAC and Rothesay.

The Court of Appeal ruled that the High Court judge had erred in his approach to considering the application for sanction, including that he had given insufficient weight to the evidence provided by the independent expert, to the lack of objection from regulators to the transfer going ahead, and to the fact Rothesay would be subject to continuing regulation.

The Court of Appeal rejected the High Court's view that there would be a material disparity between the non-contractual, external financial support potentially available for each of the two companies in the event they encountered financial difficulty, in doing so clarifying that the potential support of parent companies to distressed subsidiaries is not a relevant factor for courts to consider in determining whether to sanction Part VII transfers.

The Court of Appeal also confirmed that the judge was wrong to give any weight to the reasons objecting policyholders chose for selecting PAC as provider, nor to their reasonable assumption that PAC would provide their annuity for the duration of the term of that annuity. It said that the relevant question courts should ask is whether the proposed transfer would have a material adverse effect on the security of benefits of policyholders.

In this case, because policyholders' prospects of being paid were essentially the same regardless of whether the transfer went ahead, "… it was hard to see how there could be any material adverse effect on the policyholders' security of benefits caused by the scheme", Sir Geoffrey Vos, one of the sitting Court of Appeal judges in the case, said in summarising the court's ruling.

The Association of British Insurers (ABI) had intervened in the appeal, expressing the concerns of the insurance industry and requesting clarity for future applications.

Hammad Akhtar, head of corporate insurance at Pinsent Masons, said: "The outcome of this appeal has been eagerly awaited by insurers and reinsurers, and all those who advise on Part VII insurance business transfers. The Court of Appeal went further than it perhaps needed to when setting out its reasons for allowing the appeal."

Charlotte English, also of Pinsent Masons, said that while the High Court's ruling in the case had not prevented other Part VII transfers being sanctioned, the Court of Appeal's judgment would "likely come as a relief to insurers and the industry".

Nick Bradley, a consultant at Pinsent Masons, said: "The decision is destined to become the authority for all future Part VIIs and it will be of interest to see how the courts approach future applications, including the High Court in this case when it is reheard, in the light of the judgment, and whether the onus on the various parties involved, including not only the applicants but the regulators and the independent expert, in such applications has changed."