In the matter of Prudential Assurance Company Ltd and Rothesay Life Plc [2020] EWCA Civ 1626
On 2 December 2020, the Court of Appeal overturned a decision by Snowden J in 2019 refusing to sanction the proposed transfer of c.£12.9bn in annuity liabilities from The Prudential Assurance Company Limited (PAC) to Rothesay Life (Rothesay). This is the first time the Court of Appeal has considered the approach the court should adopt in dealing with applications to sanction transfers of insurance business under Part VII of the Financial Services and Markets Act 2000 (FSMA).
Snowden J’s judgment represented a significant development in the settled practice of the courts. It was the cause of significant concern within the market, including concern that some transfers may no longer be undertaken, that others may become more expensive and that the operation of the market may be distorted.
The Association of British Insurers is the voice of the UK insurance and long-term savings industry and its members include almost all the most prominent members of the industry. In the light of the market’s concerns, it took the exceptional step of seeking permission to intervene in the appeal. Amongst other things, it argued that insurers rely on a clear and predictable Part VII process, given the cost and time commitment of making a submission.
The Court of Appeal allowed the appeal, on the grounds that:
- the Judge should not have found that the external support available to Rothesay from its shareholders was materially different from that available to PAC from its parent and the Judge should not in any event have treated the availability of such non-contractual support as a material factor;
- the Judge had not given sufficient weight to the non-objection of the regulators and to the independent expert’s view that the likelihood of Rothesay needing external support was remote;
- the Judge should not have accorded any weight to policyholders’ choice of PAC or any expectations that their policy would remain with the same insurer or their views of the venerability/reputation of that insurer; and
- the critical question was whether the transfer would have a material adverse effect on the policyholder. Given the independent expert’s opinion that the policyholders’ prospect of being paid would be the same if the transfer was permitted, the Court concluded that no material adverse effect could be found.
The Court of Appeal’s judgment indicates that, for the purposes of assessing a Part VII transfer, meeting Solvency II requirements will be the principal measure of the transferee’s financial resilience. While it emphasised that the court does not act as a “rubber stamp”, it stressed that a judge must give “full weight” to the opinions of the regulators and independent expert and should not substitute its own expertise for theirs or depart from their view “without a proper and relevant reason”.
This landmark judgment will be welcomed by the market as a return to greater clarity and orthodoxy.
PAC and Rothesay’s Part VII application will now be reheard by the High Court.
Anthony de Garr Robinson QC acted for the intervenor, the Association of British Insurers, instructed by Rupert Lewis and Geoff Maddock of Herbert Smith Freehills. You can find the full judgment here.