Posted: 29th March 2017
Part VII transfers – which allow an insurer to transfer policies to another insurer – are becoming increasingly commonplace across the financial services industry.
This has been the case since reforms were brought in by Government following the financial crisis which required firms to ring-fence their retail banking activity. These reforms helped protect customers by disambiguating firms’ retail activity from their corporate banking activity and increasing transparency around the costs attributed to each.
To affect a transfer, a firm must get the approval of the FCA and PRA, so just as the legal obligations around a transfer must be discharged, any conduct issues will require equal attention.
More recently, some industry commentators feel the uncertainty of Brexit is contributing to further increases in Part VII activity. With this in mind, when undertaking a Part VII transfer, as well as the commercial benefits they offer, what are the conduct challenges firms will face and, importantly, what does the regulator expect from a transfer?
What is a Part VII transfer?
A Part VII transfer is a court-sanctioned legal transfer of some or all of the policies of one company to another. It is governed by Part VII of the Financial Services and Markets Act 2000 (FSMA), with supplementary guidance set out in SUP 18 of the FCA handbook.
The reasons they are performed include:
- Combining similar business from two or more subsidiaries
- Transferring business between third parties
- Separating different books of business and putting them into separate companies
The Features and benefits of the transfer
Part VII transfers involve a court-sanctioned legal transfer of business from one entity to another and are flexible tools that can be used to achieve a variety of goals, including:
- Effecting an intra-group transfer (such as ring fencing of retail banking activities from the investment banking activities of a banking group)
- Selling insurance business to a third party
- Effecting a demutualisation
The benefits of a Part VII transfer are numerous, and can include:
- Streamlining the corporate structure and improving governance
- Operational cost-saving and efficiencies
- Improved solvency
- Tax advantages
- Reduction in financial and regulatory reporting
The Conduct challenge – considering existing customers
As well as the legal considerations around transfers, there are some key conduct challenges involved in performing a Part VII transfer. This is especially true as we have, in recent years, moved into an environment where the regulatory view of conduct is centred on the outcomes provided to customers. With this in mind, early dialogue with regulators is crucial to maintaining assurance that the process is compliant and customers’ interests and concerns are assessed and treated correctly.
The regulators’ attention will primarily focus on customers not being adversely impacted by the transfer and the need for each policyholder to have adequate information on its impact. Policyholders will also need a reasonable time within which to determine whether or not they are adversely affected. They must also be told how to object if they believe they are adversely affected.
To this end, and to help mitigate any other potential risks, an impact assessment should be performed with a focus on customer outcomes, and the results of this should be incorporated into the conduct and communication around the transfer. Any material impacts must be communicated in a fair, clear and not misleading way to consumers.
As well as advertising publicly, for example in the national press, firms must communicate on an individual basis with affected customers, outlining the rationale for the proposed transfer and its customer impact.
Firms should keep an eye on the following areas to ensure they meet conduct requirements when performing a Part VII transfer:
Continuity of service – firms must ensure that a transfer will result in no material detrimental changes to the way customers receive their service. This includes ease of access to discussing their products, their ability to utilise the Financial Services Compensation Scheme (FSCS), as well as continuity of product administration, fees and other costs.
Continuity of terms and conditions, including product benefits and outcomes for customers – products and their terms must not be made materially less fair for customers under a transfer. Firms must provide product terms and benefits which are at least consistent with that of the product(s) purchased by customers.
Treatment of existing claims or ongoing complaints with the transferor – transferring information pertaining to ongoing complaints must be effective in order to deliver consistency for customers in a complaint or claim situation. Customers having to re-establish contact with the transferee and ‘cover old ground’ with regards to their case will certainly cause trust issues amongst customers and make resolution of complaints more challenging, and certainly more costly. The transfer must keep intact any consumers’ rights to redress as a result of mis-selling.
Impact of adequacy of resources on consumer protection – the transferee must have adequate resource and knowledge to ensure customers are treated fairly following the transfer. Retaining evidence that this has been assessed will increase the likelihood of approval for the transfer.
Ensure conduct is front and centre
Conduct around Part VII transfers should be viewed as a key part of the process, and the key to getting it right is identifying and understanding any adverse impacts that customers are likely to face. To neglect any of the elements above is to risk the very advantages and benefits firms seek to achieve by performing a transfer.
Both parties involved in the proposed transfer will need to satisfy the regulators that they have explained the impacts of the transfer to affected customers.
As well as this, if a firm is able to evidence their effective work in the conduct areas above, they are more likely to get approval from the regulators and therefore a positive result when it comes to the court ruling on whether or not they may go ahead with the process.
In addition to firms discharging the legal obligations they have in this area, showing a proactive approach to the treatment of customers in the modern regulatory landscape stands a firm in good stead both in the immediate term, and for their long-term management of the book of business they have acquired.