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    A Regulatory Coup for Gibraltarian Insurance Business as the English High Court Sanctions the First Part VII Transfer into the UK

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    In Provident Insurance plc and Others v The Financial Services Authority [2012] EWHC 1860 (Ch), an application was made to the High Court for directions on the application of Part VII of the Financial Services and Markets Act 2000 (FSMA) (Part VII) to a transfer of insurance business from a firm authorised in Gibraltar to a firm authorised in the United Kingdom. This was the first time that an English Court had been asked to consider whether it had jurisdiction to approve such a transfer.

    The Background
    Provident Insurance plc (Provident) and MMA Insurance plc (MMA) were both UK based, FSA authorised companies. Gateway Insurance plc (Gateway) was incorporated and authorised in Gibraltar, but carried out all of its business in the UK under the “passporting” rights conferred by the Financial Services and Markets Act 2000 (Gibraltar) Order 2001 (the Gibraltar Order). All three companies belonged to the same group.

    The application before the Court concerned a scheme to simplify the legal structure of the group’s UK operations by concentrating its general insurance business into MMA, thus enabling the number of regulated entities in the UK to be reduced. This arrangement would require both Provident and Gateway to transfer all of their general insurance business to MMA.

    Part VII FSMA 2000
    To assist with the analysis of the Court’s decision, it is beneficial to set out the basic requirements for Part VII and the regime for effecting an insurance business transfer:

    1. Section 104: no insurance business transfer scheme is to have effect unless an order has been made in relation to it under s.111(1) FSMA.
    2. Section 105(1): a scheme is an insurance business transfer scheme if it:
      a. satisfies one of the conditions in s.105(2);
      b. results in the business transferred being carried on from an establishment of the transferee in an EEA state; and
      c. is not an excluded scheme.
    3. Section 105(2) conditions:
      a. the whole or part of the business carried on in one or more member states by a UK authorised person (who has permission to effect or carry out contracts of insurance) is to be transferred to another body;
      b. the whole or part of the business, so far as it consists of reinsurance, carried on in the UK through an establishment there by an EEA firm is to be transferred to another body; or
      c. the whole or part of the business carried on in the UK by an authorised person who is neither a UK authorised person nor an EEA firm, but who has permission to effect or carry out contracts of insurance, is to be transferred to another body.

    Transfer of Gateway's Insurance Business from Gibraltar to the UK
    Mr Justice Henderson took the above requirements in turn and applied them to the facts surrounding the transfer of Gateway’s insurance business.

    The requirements of ss.105(1)(b) and (c) were dealt with swiftly and both found to be satisfied: (i) the business being transferred will be carried on from an establishment of the transferee in the UK (an EEA state); and (ii) the “excluded” schemes as set out in s.105(3) were not applicable on the facts 1.

    The question of whether the transfer satisfies one of the conditions set out in s.105(2) required a more detailed analysis. On the facts, neither of the conditions in ss.105(2)(a) and (b) applied, as Gateway is neither a UK authorised person, nor a reinsurer. S.105(2)(c) was therefore the critical condition, as it applies to: (i) transfers of business carried on in the UK; (ii) by an authorised person; (iii) who is not UK authorised; (iv) nor an “EEA firm”; but (v) has permission to effect/carry out contracts of insurance nevertheless.

    Henderson J wasted little time in finding parts (i) to (iii) of the test to be satisfied. However, the more complex issue of whether Gateway, as an insurer incorporated and regulated in Gibraltar, could be considered an “EEA firm” required further scrutiny.

    The Court first considered the definition of an “EEA firm” in s.425(1)(a), and paragraph 5(d) of Part I, Schedule 3 to FSMA, which states that an EEA Firm is a firm that does not have its relevant office in the UK and is authorised by its “home state regulator”. “Home state regulator” is, in turn, defined by paragraph 9 of Part I, Schedule 3 as “the competent authority of an EEA State (other than the UK) in relation to the firm concerned”. The Interpretation Act 1978 defines “EEA State” as any state that is party to the Agreement on the European Economic Area (the EEA Agreement). Gibraltar is not a party to the EEA Agreement; it is a British Overseas Territory, for whose external relations the UK is responsible. It is by virtue of that responsibility that Gibraltar is made subject to the Treaty on the Functioning of the European Union (the Treaty), and it is because the Treaty applies to Gibraltar that the EEA Agreement also applies to it. Gibraltar is not therefore a party to the EEA Agreement in its own right, but it is treated for the purposes of the EU and the EEA as if it was part of the UK. As a result, Gateway was not an EEA firm.

    Henderson J also considered whether the Gibraltar Order deemed Gateway to be an “EEA firm” for the purposes of Part VII, but found that the enacting legislation meant that Gateway was an “EEA firm” for the purposes of Part III of FSMA (which covers FSA authorisation requirements) but not Part VII (business transfers).

    Accordingly, s.105(2)(c) was found to have been satisfied, and the transfer of Gateway’s business was considered to be an “insurance business transfer scheme” subject to the Part VII regime. This meant the Court had the vires to sanction the proposed transfer under s.111 of FSMA.

    Transfers of UK Insurance Business (Gateway Equivalent) to Gibraltar
    It is clear from the above reasoning that FSMA and the Gibraltar Order interact in a way that brings transfers of insurance business from Gibraltar to the UK within the scope of the Part VII regime. However, a transfer from the UK to Gibraltar would fall outside that regime.

    As explained, a transfer of insurance business will only be a Part VII “insurance business transfer scheme” if the scheme results in the business transferred being carried on from an establishment of the transferee in an EEA state (per s.105(1)(b) FSMA) and (as per Henderson J) Gibraltar is not an EEA state under the Interpretation Act 1978 or the Gibraltar Order. Instead, a firm wishing to transfer some or all of its insurance business from the UK to Gibraltar would ordinarily be expected to do so under Part IX and Schedule 10 of Gibraltar’s Financial Services (Insurance Companies) Act 1987 (the Gibraltar Act). Paragraph 1 in Part I of Schedule 10 to the Gibraltar Act requires the sanction of the Supreme Court of Gibraltar before any long term insurance business may be transferred, whereas paragraph 6 in Part II of Schedule 10 to the Gibraltar Act requires the approval of the Financial Services Commission (FSC) where a transfer of general insurance business is concerned. These provisions apply regardless of whether the insurance business is being transferred from a non-Gibraltarian insurer to a business carried on in Gibraltar or vice versa. Applying this to the facts in Provident v The FSA, this means that alongside seeking a court sanction in the UK, Provident would also be obliged to obtain approval from the Gibraltar FSC before the transfer of Gateway’s insurance business to MMA could be made.

    Commentary
    This case raised an important jurisdictional issue. If Part VII had not applied, then (at least in the Court’s view) the relevant insurance business could only have been transferred by obtaining each policyholder’s agreement to the novation of his policy from Gateway to MMA; an option that, for practical reasons, would not have been feasible. Alternatively, and subject to the terms of the relevant policies, Gateway and MMA could have agreed that Gateway would assign its rights, and equitably assign its obligations, under the policies. This arrangement would have had a Part VII transfer-like effect, providing the firms had also given notice of the assignments to Gateway’s policyholders and MMA had given Gateway an indemnity against any claims it was subsequently obliged to pay. However, this is also likely to have been more complex and less effective than a Part VII transfer.

    This decision therefore highlights the value of the Part VII regime as a restructuring tool for insurance businesses. The finding of Henderson J also serves as a reminder to parties of the potentially significant role that the FSA can play in any Part VII transfer application, not least because any English court considering a transfer is likely to be greatly influenced by any objections that the FSA makes. In Provident v The FSA, the collaborative attitude taken by the parties in respect of the question of jurisdiction was notable and thus permitted the judge to deal with the matter clearly and efficiently.


    Footnote:

    1. The provisions of s.105(3) are beyond the scope of this article and therefore have not been set out above.

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