On 20 July 2017, HM Treasury published responses to the November 2016 consultation on the design of a UK legislative framework for Insurance Special Purpose Vehicles (ISPVs) and published final drafts of the legislation which will now make their passage through Parliament. The Treasury consultation followed an announcement in March 2016 that the UK should develop a competitive corporate and tax structure to attract Insurance Linked Security (ILS) vehicles to be established in the UK. The aim of the new regime is to ensure that the UK can be a major contributor to the growth and development of the global ILS market.

The November 2016 consultation proposed a corporate legislative structure (The Risk Transformation regulations 2017) and tax legislative structure (The Risk Transformation (Tax) Regulations 2017). The Treasury have now published revised regulations taking into account responses to the consultation.  Both the PRA and FCA are expected to respond to the consultation response and draft regulations in due course.

It is worth noting the following in relation to the final draft legislation:

Proposed corporate structure for multi-arrangement ISPVs

  • Application to use a PCC – Any application to use a Protected Cell Company (PCC) should be included in an application to carry out the regulated activity of “insurance risk transformation”. When a new cell is created in the PCC, the FCA must be informed and will incorporate the cell. The PRA should be notified within 5 days of the cell assuming risk.
  • Arrangements between cells – respondents to the consultation urged the Government to enable arrangements between cells, for example the tranching of risk between different groups of investors. Under the revised regulations limited movement of assets between cells may be possible subject to strict procedural requirements. It will be a requirement for the PCC to keep clear records and accounts distinguishing the assets and obligations of the different cells. Any such arrangements must be consistent with the Solvency II fully funded requirement. Where a PCC intends to make use of such arrangements, a proposal should be included in the scope of permission granted for a multi-arrangement ISPV (mISPV). Without being included in the scope of permission, such arrangements will not be permitted.
  • Directors’ duties – The Government intends to require that directors of a PCC should be subject to an additional duty to exercise diligence to ensure that a PCC complies with the Risk Transformation Regulations 2017 and act in accordance with any enforceability arrangements made between cells.
  • Insurance management – The Government did not adopt respondents’ suggestions that a regulated insurance management regime be created in the UK in lieu of the more onerous FCA Approved Persons and Senior Insurance Managers Regime which will apply to ISPVs.

Proposed Tax approach

  • No corporation tax for QTVs – The November 2016 consultation proposed to introduce a bespoke tax regime for ISPVs that have qualifying transformer vehicle (QTV) status. If an ISPV does not have authorisation to carry out insurance risk transformation it cannot qualify as a QTV. The Government has decided that the insurance risk transformation activities of a QTV should not be subject to corporation tax and that debt and equity payments made from the ISPV to investors should be fully exempt from withholding tax.
  • Asset distribution within 90 days – Following comments from respondents, the Government has decided to extend the period within which assets can be distributed (after the satisfaction of insurance liabilities) from 30 days to 90 days.

Authorisation and supervision

  • Post-transaction notification – Respondents to the Government consultation raised concerns about the requirement for pre-transaction notification to the PRA of new mISPV cells. The Government has now proposed that a post-transaction notification regime is appropriate, requiring mISPVs to notify the PRA within 5 working days of any new assumption of risk. The approach to the creation of new cells or risk transfer deals should be defined in the Part 4A application for authorisation. Accordingly, the PRA will give permission to enter particular types of transaction in the future where they fall with the parameters of permission granted. Any assumption of risk that is not within the original scope of permission will require a variation of permission.

What happens next?

The Risk Transformation regulation 2017 will come into effect on 31 October 2017. The Risk Transformation (Tax) regulation 2017 will come into effect the day after the day they are made.

For further information: Treasury publishes final draft of ILS regulations