On April 25, 2014, the PRA published SS3/14: The PRA’s approach to schemes of arrangement proposed by PRA-authorised insurers under Part 26 of the Companies Act 2006.
SS3/14 provides feedback on the responses submitted to the September 2013 consultation on the PRA’s draft supervisory statement (CP6/13) and clarifies the approach that the authority will take to any future schemes proposed by insurers. In addition, SS3/14 explains the role that the PRA will play in assessing any scheme and provides insight into how the PRA will work with the Financial Conduct Authority (FCA) when considering its view on a scheme proposal.
What is a scheme of arrangement?
A scheme of arrangement is a statutory process (under Section 26 of the Companies Act 2006) whereby a company can enter into a mass compromise with its creditors. The scheme is binding on all creditors once the requisite formalities have been completed, including a vote in favour at a meeting of all creditors (or each meeting of separate classes of creditors) and the sanction of the Court. The vote must be approved by 50 per cent in number and 75 per cent in value of all creditors entitled to vote (or each class of creditors).
What are supervisory statements?
Supervisory statements are made by the PRA in order to provide guidance to firms and to clarify the expectations of the authority on a given topic.
What approach does the PRA take?
In CP6/13, the PRA set out its draft statement on the use of schemes by ‘general insurance firms’. In CP6/13, the PRA took the line that schemes of arrangement may be compatible with its statutory objectives, namely to ensure the safety and soundness of the financial system and the protection of policyholders.
For example, the PRA suggested that schemes might be appropriate where an insurer is no longer solvent. However, CP6/13 stated that there were situations where a scheme is unlikely to meet the PRA’s objectives, namely where a solvent scheme is proposed. According to the draft statement this was because the use of a scheme by a solvent company would undermine the traditional shareholder/creditor hierarchy: enabling shareholders to extract capital from the business while policyholders were subject to a binding compromise in respect of potential claims.
Although SS3/14 reiterates the position taken in CP6/13 that a scheme of arrangement may be compatible with its objectives where an insurer is insolvent (as it can enable the insurer to maximize the assets available to distribute to its creditors), the PRA has amended its statement from the original proposal to state that solvent schemes “may not be” compatible with its objectives (CP6/13 had stated that solvent schemes are “unlikely” to be compatible).
Rather than focusing on how schemes might enable shareholders to extract capital while binding policyholders, SS3/14 states that solvent schemes may not be compatible as firms may wish to exit a portfolio for commercial reasons. In such circumstances, SS3/14 states, a solvent scheme may compromise policyholders’ cover when the firm can continue to pay claims as they fall due.
What role does the PRA propose to play in a scheme?
The PRA is not given any role in relation to the procedures for a scheme of arrangement under Part 26 of the Companies Act 2006. Only the court has the power to determine whether or not a scheme should be sanctioned. The PRA nevertheless states in SS3/14, that it will review all schemes in order to determine whether they pose a risk to its statutory objectives. After assessing each scheme, the PRA will consider whether it will inform the court of its views and if so, how those views will be communicated.
The PRA will expect any firms considering whether to undertake a scheme to inform the authority about its proposals with “sufficient time” for them to assess the impact on policyholders. SS3/14 specifies that failure to provide adequate notice could be considered a breach of Principle 11 (relations with regulators).
In particular, SS3/14 states that insurers proposing a scheme will need to provide the PRA with an explanation of:
- the nature of the business to be included in the scheme;
- the nature of the underlying policyholders (presumably to consider the sophistication of the policyholders);
- why the firm believes that the scheme is compatible with the PRA’s objectives; and
- what steps will be taken to ensure that policyholders will have an appropriate degree of continuity of cover (including in some circumstances what proposals the firm has for those policyholders who do not support the proposed scheme).
The PRA will consider each proposal on its facts. The PRA will take into account the particular business of the firm when considering the impact of the scheme on its statutory objectives.
Discussions with the FCA
In addition to discussing any proposals to undertake a scheme of arrangement with the PRA, firms should also inform the FCA of their plans.
Feedback on CP6/13
The PRA has provided feedback on some of the comments submitted in response to its draft statement. In particular, the PRA states that, although it is given no specified powers or role in relation to schemes of arrangement under Part 26 of the Companies Act 2006 it has a “regulatory interest’ in ensuring that firms act in a manner consistent with the authority’s statutory objectives when proposing a scheme.
The PRA refutes suggestions that the statement represents a hard and inflexible approach to schemes. In SS3/14, the PRA says that this was not their intention. Rather, each proposal will be considered on its particular facts. The statement has been amended to clarify this.
The PRA has also responded to questions as to whether the statement applies to life and general insurers; the consultation referred only to general firms. The PRA has responded that the statement does indeed also apply to life business.
In response to questions raised about the impact of the statement on investment and innovation in the UK insurance market the PRA has responded that, since its new remit to consider its Secondary Objective on competition which came into effect in March 2014, the authority has confirmed that competition will be a relevant issue for consideration in each case.
View SS3/14: The Prudential Regulation Authority’s (PRA’s) approach to schemes of arrangement proposed by PRA-authorised insurers under Part 26 of the Companies Act 2006, 25 April 2014