The Financial Services and Markets Act (the Act) received Royal Assent on 29 June 2023. Although certain key provisions (for example the rules relating to critical third parties) came into force on the same date, the Government is taking a phased approach and other provisions will be brought into force on days to be appointed (if not already specified). From an insurance perspective, the provisions of the Act specifically concerning insurers relate to updating and clarifying existing arrangements under the Financial Services and Markets Act 2000 (FSMA) for those insurers in financial difficulty. These provisions will come into force on 29 August 2023.

The existing write down arrangements for insurers are found in s.377 of FSMA 2000 and enable the court to reduce the value of one or more of the contracts of an insurer which has been ‘proved to be unable to pay its debts,’ as an alternative to making a winding-up order (which would place the insurer into liquidation). This reduction is referred to as a ‘write-down’ of liabilities, but the FSMA 2000 process is considered vague in certain respects and has never been used. Accordingly, significant uncertainties around its application exist, which may limit its usability, even where it could provide a better outcome for the creditors and policyholders of an insurer in financial distress; for example, by ensuring continuity of cover. Section 58 and  Schedule 12 (write down orders) and Schedule 13 (enforcement of contracts) of the Act expand, enhance and clarify s377, through various provisions which provide as follows:

  • The court may make a write-down order in relation to an insurer if it is satisfied that (a) the insurer is, or is likely to become, unable to pay its debts, and (b) making the order is reasonably likely to lead to a better outcome for the insurer’s policyholders and other creditors than not making it.
  • A write-down order may not be made in relation to an insurer which is already in administration or liquidation. Certain debts such as wages or a liability with an original maturity of less than 7 days, cannot be written down.
  • The Act creates a new position of a write down manager. This person would be an officer of the court and the role would include overseeing and supporting the court order and designing a proposal for the court which protects policyholders’ interests. The PRA is required to provide a statement confirming the person proposed to be appointed is suitably qualified – the manager has to be an actuary, a licensed insolvency practitioner, or a suitably qualified insurance professional.
  • An application to the court for a write-down order in relation to an insurer can be made by the Treasury, the PRA, the insurer, a shareholder of the insurer, or a policyholder or other creditor of the insurer. Any court application for a write down (except for those made by the Treasury or the PRA) requires PRA consent.
  • The Act introduces a moratorium in respect of termination rights in certain service contracts and financial contracts. This includes reinsurance, loan agreements and guarantees, and prevents the counterparty to the contract terminating it because the insurer is in financial difficulties. In addition, where the counterparty is the supplier of goods or services to the insurer, it is not permitted to demand payment of outstanding charges in return for continuing to supply such goods or services. An exception is applied where consent to terminate has been given by the write down manager / liquidator / administrator, or the court. Such consent may only be given where it is determined that not doing so would cause hardship to any person.
  • Pay as paid clauses are overridden (and note a reinsurer is liable for the full recovery notwithstanding that the cedant ’s obligations to the policyholders may have been written down).
  • There is a suspension on switch and surrender rights in relation to life policies. Policyholders will be unable to surrender beyond a defined limit (no more than 5% of policy value per year, whilst the insurer remains in financial difficulties), unless consent for a greater amount has been given by the write down manager / liquidator / administrator, or the court. Such consent may only be given where it is determined that not doing so would cause the policyholder hardship.
  • There is a restriction on the enforcement of security against insurers and restrictions on such insurer paying dividends or variable remuneration (e.g. bonuses).
  • The Financial Services Compensation Scheme (FSCS) is required to protect policyholders whose entitlements reduce in value following a write down.

The Act specifically provides that the write down does not permanently extinguish the insurer’s liability.  The measures are not intended to change the insurers’ contractual obligations, but are designed to give insurers a chance to recover.

The Bank of England continues to consult on “Solvency UK”, which will replace Solvency II, parts of which will be in force by the end of the year, other parts by June 2024 and the remainder by December 2024.