Court of Appeal hands down judgment on Part VII insurance business transfer

The Court of Appeal today handed down judgment in the matter of the Prudential Assurance Company Limited, Rothesay Life PLC and Part VII of the Financial Services and Markets Act 2000, see full judgment here.

This was the first occasion which the Court of Appeal has considered the Part VII jurisdiction, that is, the jurisdiction under Part VII of FSMA to transfer a portfolio of insurance policies from one insurer to another.

3VB’s Theodor Van Sante and Robert Purves acted for the UK Financial Conduct Authority (the FCA) at first instance. On the appeal, 3VB’s Tom Weitzman QC appeared for the UK Prudential Regulation Authority (the PRA), Robert Purves appeared for the FCA and Charlotte Eborall (led by Barry Isaacs QC) appeared for a group of the objecting policyholders.


In August 2019, Mr Justice Snowden exercised his discretion to refuse an application made jointly by the transferor, the Prudential Assurance Company Limited (PAC), and the transferee, Rothesay Life plc (Rothesay), for the court to sanction a scheme which would have transferred some 370,000 annuities in payment from PAC to Rothesay.

Mr Justice Snowden’s reasons for refusing sanction were essentially: first, that Rothesay did not have the same capital management policies as PAC, or the backing of a well-resourced group with a reputational imperative to support it over the lifetime of the annuity policies;  and secondly, that it had been reasonable for the objecting policyholders to have chosen PAC in the light of PAC’s sales materials, age and reputation, and on the basis of an assumption that PAC would not seek to transfer their policies to another insurer.

The companies appealed.

The PRA and the FCA exercised their right to be heard on the appeal, with a view to assisting the court in their respective capacities as the prudential and conduct regulators of PAC and Rothesay but adopting a neutral stance in relation to whether the appeal should succeed or not.  The policyholders made submissions through representation or in person.

The Association of British Insurers (ABI) also intervened.

General approach in Part VII insurance business transfers

The Chancellor, together with David Richards LJ and Sir Nicholas Patten, took the opportunity to set out the Court of Appeal’s views on the insurance business transfer regime generally, warning that (at paragraphs 39 to 42 of the judgment) there can be no single test laid down for Part VII transfers, due to the wide range of businesses, and circumstances, in which such transfers may be proposed.

Accordingly, the Court of Appeal said that it was “undesirable” for them to try to produce a definitive categorisation. Nevertheless, the Court of Appeal did make the following two distinctions: (1), between general and long-term insurance business; and (2) between policies that vest a discretion in the insurer, and those that do not.

After considering the key first instance authorities, the Court of Appeal then turned to consider Mr Justice Snowden’s decision and the approach that a judge should take in the exercise of the Court’s discretion when asked to sanction a Part VII scheme. The Court of Appeal held (at paragraphs 75 to 86 of the judgment):

  • The judge should first identify the business being transferred and circumstances giving rise to the scheme. Different considerations arise for different businesses.
  • In relation to the exercise of the discretion:
    • “The discretion … has frequently been said to be unfettered and genuine and not to be exercised by way of a rubber stamp. That is true but, as in the exercise of all discretions, the court must take into account and give proper weight to matters that ought to be considered, and ignore matters that ought not properly to be taken into account. The correct identification of which matters fall on which side of the line in particular transfer situations has caused some confusion in this, and perhaps other, cases.”
  • The earlier first instance decisions in Re London Life and Re Axa were not to be treated as comprehensive or applying in all cases; they both concerned the transfer of with-profits business, and turned on their specific facts.
  • In the instant case, the paramount concern was to assess whether the proposed scheme had any material adverse effect on the security of payment of the annuities sought to be transferred or on service standards.
  • The duty of the court is first, to scrutinise the reports of the independent expert and the regulators, and the evidence of any person entitled to be heard.
  • The court will always accord full weight to the opinions of the independent experts and the regulators, such that the court cannot legitimately reach a different view without “significant and appropriate reasons for doing so” and this is particularly the case in relation to issues that are the subject of actuarial assessment.
  • Materiality means “a possibility that cannot sensibly be ignored having regard to the nature and gravity of the feared harm in the particular case” which is a consequence of the scheme and material in the sense that it is “real or significant as opposed to fanciful or insignificant”.
  • Even a scheme having a material adverse effect may still be sanctioned where “the proposed scheme as a whole is fair as between those interests”.

Decision in PAC/Rothesay’s transfer

The Court of Appeal allowed the appeal, concluding that Mr Justice Snowden made errors in his approach to the exercise of his discretion, which meant that his judgment could not stand. His order refusing to sanction the scheme was set aside.

The Court of Appeal’s reasoning was, essentially, threefold.

  1. The Court of Appeal found that the judge took a wrong turn in his judgment in believing that the opinions of the expert and the PRA that there was only a remote chance of parental support being required in future were not justified because they looked at the solvency of Rothesay and its balance sheet only at a specific date. The Court of Appeal held that “the fact that Rothesay would continue to be regulated under the same rules from year to year into the foreseeable future meant that the present conclusion of the expert and the PRA were valid parameters for Rothesay’s future security”.The Court of Appeal then went on to explain that “ In our judgment, it is important to understand, as the PRA submitted, that its prudential assessment of a scheme involves consideration of the future. The PRA takes account of the transferor’s and transferee’s respective abilities to measure, monitor and manage risk and to conduct their business prudently. That includes their ability to take corrective action in the event that there is a material deterioration of their balance sheets. The PRA also takes account of the fact that the transferor and transferee will continue to be supervised by the PRA on an ongoing basis, and its ability to encourage, or require, them to take corrective action if it considers such actions necessary.” The Court of Appeal concluded that the judge’s finding that he could not be confident that the companies’ balance sheets would not deteriorate was speculative and incorrect and rejected the submission made on behalf of the policyholders that the expert and PRA were only assessing financial security over a one-year time period. (See paragraphs 87 to 106 of the judgment).
  2. The Court of Appeal also held that the judge failed to give adequate weight to the expert’s conclusion and the regulators’ lack of objection to the Scheme, which the Court of Appeal says should be given “full weight”. (See paragraphs 107 to 109 of the judgment).
  3. The final key point on which the Court of Appeal held that the judge fell into error was in giving too much weight to policyholders’ subjective (the Court of Appeal held) preference for the “Venerability” (age and reputation) of PAC as compared to Rothesay. The Court of Appeal concluded that if the policyholders’ prospects of being paid were essentially the same with and without the Scheme, then it was it is hard to see how the scheme could be said to materially adversely affect policyholders. In reaching this conclusion, the Court of Appeal determined that whilst non-actuarial factors may be relevant to the exercise of the Court’s discretion to sanction a scheme, the subjective views of policyholders were not relevant and ought not, in this case, to have been given any weight. (See paragraphs 111 to 128 of the judgment).
  4. In relation to other points raised by the Appellants, and raised by the intervener, the ABI, the Court of Appeal held that:
  • The commercial judgment of the Board had little if any further role to play beyond ensuring that the directors were acting in accordance with their statutory and other duties and was not a matter to which the court should give any weight (the Court of Appeal noting that the earlier decision, London Life, in which weight was given to the Transferor’s Board’s commercial judgment turned on its particular facts) (paragraphs 122 to 128 of the judgment).
  • The judge was right to treat as irrelevant the prejudice that the Appellants might suffer if the Scheme was not sanctioned, and the correct approach is to assess the material adverse effect upon the policyholders’ security of benefits (paragraphs 129 to 131 of the judgment).
  • The judge was also right to say that the availability of the FSCS and the protection it afforded policyholders of insolvent insurers was not a relevant consideration, because this applied equally before and after the transfer (paragraph 108 of the judgment).


No doubt this decision will be a welcome one for insurers, providing clarity and predictability in relation to the outcome of Part VII schemes into which much time, resources and funds are ploughed before the application is even issued at court, let alone sanctioned. But the High Court, insurers, regulators, and interested parties may need to recalibrate their approach in relation to Part VII transfer applications. Re London Life and Re Axa are not to be taken as gospel; “full” weight will be given to the views of the independent expert and the regulators; and in exercising its discretion the Court must be careful to “ignore” matters such as policyholders’ preference for one insurer over another.

This will be a correspondingly disappointing decision for policyholders, as it appears to narrow the legitimate grounds of objection to a transfer scheme, even if the motivation for the scheme is purely commercial and offers the policyholders no ‘up-side’ to compensate for the uncertainty that a transfer scheme creates.

PAC/Rothesay’s renewed application for the scheme to be sanctioned will be considered by another High Court Judge at a future date.

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