In the UK, insurance business transfer schemes (known as Part  7 transfers) allow an insurer or reinsurer to transfer portfolios of insurance or reinsurance business from another entity by way of a court sanctioned regulatory mechanism.  On 9 April 2008, HM Treasury published the “Consultation on amendments relating to Part 7 of FSMA 2000: summary of responses” (the Summary). The Summary set out the responses to the Treasury’s consultation paper which was published in November 2006 (the Consultation Paper) which proposed amendments to  the Part 7 procedure which is governed by the Financial Services and Markets Act 2000  (FSMA).

These proposed amendments were, in summary, supposed to consider whether  the relevant section of FSMA  should be amended to:

  • “put it beyond all doubt”: 
    • that Part 7 could be used to transfer reinsurance;
    • that the Court had the power to override certain contractual provisions that purported to modify or annul contracts when transferred or when a preparatory step towards transfer was taken;
  • ascertain whether provision should be made to ensure reinsurers were notified of a relevant Part 7 transfer; and
  • ascertain whether all former Lloyd’s Names should be permitted to participate in a Part 7 transfer.
The Treasury received around 120 responses from a variety of interested parties. In relation to the provisions regarding  the transfer of reinsurance, they agreed that the court’s powers should be clarified. However, the consultees voiced concern that the interest of reinsurers should be protected in order to preserve their rights under the reinsurance contracts. The Treasury responded by explaining that specific provisions to protect reinsurers were not appropriate as it “was for the court to determine whether and on what terms to approve a proposed transfer, taking into account all relevant factors.”   As a result, the Court will have the power to override  certain contractual provisions that purport to modify or annul contracts when transferred or when a preparatory step towards transfer is taken
 
In relation to notification, the response from “a clear majority” of the consultees was in favour of amending the legislation in order to require that reinsurers be notified of a relevant Part 7 transfer. The Treasury agreed and stated that the amended provisions would merely “formalise what in many cases is simply good practice”. However, the Treasury stated that if “the nature, time period, or complexity of the chain of business is such that direct notification of all reinsurers would be impossible or disproportionately expensive” then the Court may dispense with the obligation.
 
Finally, the Treasury received a number of responses from consultees who were opposed to the expansion of Part 7 transfers to all former Lloyd’s Names.  These consultees voiced concern that allowing older Lloyd’s policies covering long-tail liabilities to be transferred in this way would compromise the cover. This criticism was based on the fact that removing claims from Lloyd’s names would remove an extra layer of security (i.e. the Lloyd’s Central Fund and Lloyd’s American Trust funds).  Specific concerns were raised that the proposed amendments would permit Equitas to transfer a whole chain of its business.  The Treasury stated that it still did not believe that the date of resignation of a Lloyd’s Name should preclude it from utilising Part 7. In making this decision, the Treasury stated that it would not be appropriate for the “Treasury to seek to influence the terms of a particular transfer.”
 
The Treasury has made it clear that it will lay the three Statutory Instruments implementing these changes before Parliament as soon as possible after a month has elapsed since the publication of the Summary.  If you would like the read the Consultation Paper and the Summary please use the following links: 
  
Consultation on amendments relating to Part 7 of FSMA 2000 (‘Control of Business Transfers’) (PDF file) published 3 November 2006.

Consultation on amendments relating to Part 7 of FSMA 2000: summary of responses (PDF file, 444KB) published 9 April 2008.