Insurance Business Transfers: the New Regime Under the Financial Services and Markets Act 2000


Part VII of the Financial Services and Markets Act 2000 (the "Act") contains a new regime for the transfer of insurance business (both long term and general), replacing the previous transfer process under Schedule 2C to the Insurance Companies Act 1982. As a result, the Schedule 2C procedure is no longer available for the transfer of either general or long term business (save where the legal process was commenced under Schedule 2C prior to 1 December 2001). Part VII also makes provision, for the first time, for a similar process in relation to the transfer of banking business.

Part VII will be highly significant to the insurance industry. Although there are many similarities with the old Schedule 2C provisions, there are also some important developments and differences. This article provides some thoughts on how the new regime will work in practice, and deals with the most significant changes from the old Schedule 2C procedure. We also deal briefly with the similar procedure in Part VII in respect of banking business transfers.

Sources of the new regime

There are three main sources for the new insurance business transfer regime:

Part VII of, and Schedule 12 to, the Act

The Financial Services and Markets Act 2000 (Control of Business Transfers) (Requirements on Applicants) Regulations 2001 (the Regulations")

Guidance from the Financial Services Authority (the "FSA") set out in Chapter 18 of the Supervision Manual (the "Guidance")

Further regulations may be made in the future under Section 108 and/or Section 117 of the Act.

The mandatory nature of the new regime

Under the Part VII regime, it is important to note that, in relation to both long term and general business, it is not possible to effect an insurance business transfer scheme, other than by obtaining an order of the Court under Part VII (this is the effect of Section 104 of the Act). Accordingly, companies should now be particularly careful if they are planning the transfer of general business, since such transfers previously did not require the Court's sanction.

A unified treatment for long term and general insurance business

One of the most important things about the new regime is that it has for the first time resulted in a substantially similar law and practice for both long term and general business.

Previously, under Schedule 2C, the procedure for long term business and general business had been quite different. The latter had involved approval by the FSA alone, and had not required production of a report on the effect of the scheme by an expert.

The procedure has now been unified for the two types of business, in a form substantially similar to the former procedure for long term business. Therefore, in addition to the requirement for Court sanction, a scheme report must be produced, irrespective of whether the insurance business being transferred is long term or general.

The key concept - an "insurance business transfer scheme"

The expression used in Section 105 of the Act is "insurance business transfer scheme". The underlying concept is similar to that which had existed under Schedule 2C, but the Act provides additional clarity and detail.

First, the scheme must result in the business transferred being carried on from an establishment of the transferee in an EEA State. Section 105(2) of the Act then imposes additional conditions, any one of which may apply, so that there will be an insurance business transfer scheme if the whole or part of the relevant business is to be transferred to another body and:

a the transferor is a "UK authorised person" (i.e. an authorised person which is incorporated in the United Kingdom or is an unincorporated association formed under the law of any part of the United

Kingdom); or

b the business is reinsurance carried on in the United Kingdom; or

c the business is carried on in the United Kingdom and the transferor is neither a UK authorised person nor an EEA firm (a term defined in Schedule 3 of the Act to mean, essentially, an insurance company authorised in an EEA State to carry on direct insurance business).

Under the new regime, there are certain categories of excluded scheme, where (except in the case of schemes by a friendly society) use of the Court procedure is permitted, but not compulsory.

When is a scheme a scheme?

Although the term "scheme" is used in Section 105 of the Act (in the expression "insurance business transfer scheme"), it is not considered to have any particular meaning or to denote any particular form of transfer instrument. For example, the FSA states in the Guidance (at paragraph 18.1.5) that a novation or a number of novations could constitute an insurance business transfer governed by the legislation if their number or value were such that the novation can be properly regarded as amounting to a transfer of "part of the business". It is not clear, however, what the scope of the expression "whole or part of the business", as it appears in Section 105 of the Act, is intended to be. The Guidance does not assist in this regard, and none of the reported cases on the old Schedule 2C process helps to explain the concept. It is therefore sensible to assume that the expression has a very wide meaning, and that any portion of the...

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