Green light for Prudential and Rothesay’s transfer

In what is a significant decision for the insurance sector the Court of Appeal has overturned the High Court’s refusal to sanction the transfer of a portfolio of annuity policies from Prudential Assurance Company Ltd (“Prudential”) to Rothesay Life Plc (“Rothesay”) under Part VII of the Financial Services and Markets Act 2000 (“Part VII”).

The Court of Appeal found that the High Court judge exercised his discretion incorrectly, finding amongst other things, that the judge was wrong to give weight to (i) the different capital management policies of Prudential and Rothesay; and (ii) the objections of a small subset of policyholders. The decision is good news and will be welcomed by those involved in Part VII schemes.

Court of Appeal’s Decision

The Court of Appeal heard submissions from the Prudential Regulation Authority (PRA) the Financial Conduct Authority (FCA) and the Association of British Insurers (ABI) as well as the parties and three policyholders.

On 2 December 2020, the Court handed down its judgment finding that the appeal should be allowed. The renewed application for the sanction of the scheme will now be referred to another judge sitting in the Insolvency and Companies List of the Business and Property Courts of England and Wales.

Key Points

The Court of Appeal provided a comprehensive explanation of the approach the Court should adopt when considering the sanction of a scheme under Part VII, this included:

• Identifying the nature of the business being transferred and the underlying circumstances giving rise to the scheme;
• The paramount concern of the Court being to assess whether the transfer would have a material adverse effect on the policyholders’ security of benefits and on the service standards provided to transferring policyholders;
• That the first duty of the Court is to scrutinise the reports of the independent expert, PRA and FCA, as well as the evidence of any person alleging to be adversely effected by the scheme;
• That in the absence of defects in the reports and the evidence, the Court should accord full weight to the opinions of the independent expert and the Regulators and that in doing so the Court would not depart from such recommendations and non-objections without significant and appropriate reasons for doing so;
• In considering the question of material adverse effect, the Court explained that an adverse effect would be considered material where (i) it cannot sensibly be ignored having regard to the nature and gravity of the feared harm in the particular case; (ii) is a consequence of the scheme; and (iii) is material in the sense that there is the prospect of real or significant risk to the position of the stakeholder involved.

Having considered the above, and having regard to all the circumstances of the case, the Court must then decide whether or not to sanction the scheme.

In relation to the Prudential/Rothesay scheme, the Court summarised what it considered to be the central issues raised by the Appeal finding as follows:

• That Snowden J misunderstood the nature of the continuing regulation of authorised insurers and its significance and was wrong to decide that both the independent expert and PRA were not justified in looking at the solvency metrics at a specific date to support their opinion that there was only a remote chance of parental support being required in the future.
• That Snowden J had been wrong to find that there was a material disparity between the non-contractual external financial support potentially available to Prudential and Rothesay. The Court found that this was an irrelevant factor given that parent companies could never be required to provide non-contractual support to their subsidiaries’ capital as well as being at liberty to sell their regulated subsidiaries to other companies with lesser resources.
• That Snowden J should not have accorded any weight to the fact that the policyholders had chosen Prudential based on its long established reputation, age and venerability nor to the fact that they had reasonably assumed that Prudential would be their annuity provider throughout its lengthy term.

It is rare that Companies Court cases of this nature are appealed, but it is clear that Prudential/Rothesay’s decision to appeal the earlier judgment has been vindicated.

Conclusion

The ruling is positive for Prudential & Rothesay, who will now have their application for sanction under Part VII renewed before the High Court. The judgment also provides a welcome clarification for the insurance industry as to the principles that the Court will apply when deciding whether to sanction a Part VII transfer. While the first instance decision had been distinguished in a number of subsequent High Court decisions, the judgment provides greater certainty that insurers can expect sanction to be forthcoming with a favourable independent expert report and non-objection from regulators.