Background

The legal process under Part VII of the Financial Services and Markets Act 2000, which allows the transfer of insurance policies from one insurer to another, is a longstanding requirement necessitating court approval. There have been many applications over the years which have been blessed by the court. However, Prudential’s recent proposed transfer which related to an £11.2bn sale of annuities from Prudential to Rothesay, covering 366,000 policyholders, was not so lucky. The judge declined to approve the transfer despite the independent expert appointed by the court being satisfied that the transfer would have no material adverse effect on the security of policyholders’ benefits, and the FCA and PRA being happy for it to proceed.

Reasoning

Around 1,000 policyholder responses to the plans (15% of total responses and 0.4% of the 258,000 policyholders communicated with), could be characterised as objections. The judge accepted that the opposing policyholders had chosen Prudential because of its age and established reputation, that Rothesay lacked those attributes, and that the court should give some weight to their exercise of contractual choice.

Although Prudential had made no contractual promise to policyholders that it would not transfer their policies to another provider, the judge said that there was considerable force in the policyholders’ submissions that they reasonably assumed this would not happen. The judge also thought that it was reasonable for policyholders reading statements that they were buying “a lifetime annuity with Prudential” to make the assumption that – unless they agreed otherwise – it would be Prudential that would provide them with the resulting annuity for life.

Finally, the court found that it was not a fanciful possibility that either provider might require external financial support over the annuitants’ lifetime.

In such an event, there was a material difference in the potential availability of assistance for the two companies in question.

What are the implications?

Perhaps the key message to take from the decision is that the court will jealously guard its discretionary role in the Part VII procedure. Although the judge accepted that the court’s focus in many Part VII cases was on the security of policyholders’ benefits, he laid emphasis on the court being obliged to consider “all the circumstances of the case”. There is no presumption in favour of transfer and if the agreement of the independent expert and relevant regulators were enough, then there would have been no need for the legislation to give the court a role at all.

The judge did not make any broader assertions about the selection of insurers in other scenarios; however, this judgment will clearly cause concern more widely that policyholder activism might become a new feature of Part VII transfer proposals.

Perhaps unsurprisingly, Rothesay has filed an appeal against the decision, although it’s unlikely to be heard for several months.

It will be interesting to see how the Court of Appeal deals with the case and whether it treats the judgment as laying down principles of wider application.

In the meantime, insurers are likely to proceed with caution, and in some cases perhaps not proceed at all, until more clarity is available.

Pete Coyne – Partner, and
Amanda Chamming’s – Senior Associate, CMS
Cameron McKenna Nabarro Olswang LLP

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