1The rules in this section apply on an ongoing basis to linked long-term contracts that are effected by:

1. (1)

   insurers other than EEA insurers; and

2. (2)

   EEA insurers in the United Kingdom.

3 COBS 21.3 (Further rules for firms engaged in linked long-term insurance business) applies only in respect of linked long-term contracts of insurance where the investment risk is borne by a policyholder who is a natural person.

For the purposes of determining policyholder benefits, a1firm must ensure that the values of its permitted links are determined fairly and accurately.

1An insurer must not contract to provide benefits under linked long-term contracts of insurance that are determined wholly or partly, directly or indirectly, by reference to fluctuations in any index or wholly or partly by reference to the value of, or the income from, or fluctuations in the value of, property other than in accordance with the rules in this section.

A firm must notify its linked policyholders of the risk profile and investment strategy for the linked fund:

1. (1)

   at inception, and

2. (2)

   before making any material changes.

1A firm that has entered into a reinsurance contract in respect of its linked long-term insurance business must nevertheless discharge its responsibilities under its linked long-term insurance contracts, as if no reinsurance contract had been effected.

A firm must notify the FCA1 in writing as soon as it becomes aware of any failure to meet the requirements of COBS 21, or of the PRA Rulebook Solvency II Firms Investments to the extent applicable to linked long-term contracts of insurance.1

4The rules in this section apply to linked long-term contracts of insurance where the investment risk is borne by a policyholder who is a natural person.

An insurer must not contract to provide benefits under linked long-term contracts of insurance4 that are determined:

1. (1)

   wholly or partly, or directly or indirectly, by reference to fluctuations in any index other than an approved index;

2. (2)

   wholly or partly by reference to the value of, or the income from, or fluctuations in the value of, property other than any of the following:

   1. (a)

      approved securities;

   2. (b)

      listed securities;

   3. (c)

      permitted unlisted securities;

   4. (d)

      permitted land and property;

   5. (e)

      permitted loans;

   6. (f)

      permitted deposits;

   7. (g)

      permitted scheme interests;

   8. (h)

      approved money market instruments meeting the requirements in COBS 21.3.6 R to COBS 21.3.8 G;4

      4
   9. (i)

      cash;

   10. (j)

       permitted units;

   11. (k)

       permitted stock lending; and

   12. (l)

       permitted derivatives contracts.

4A firm must classify the types of property listed in COBS 21.3.1R (2)(a) to (2)(l) according to their economic behaviour ahead of their legal form.

4A money-market instrument will be regarded as normally dealt in on the money market if it:

1. (1)

   has a maturity at issuance of up to, and including, 397 days; or

2. (2)

   has a residual maturity of up to, and including, 397 days; or

3. (3)

   undergoes regular yield adjustments in line with money market conditions at least every 397 days; or

4. (4)

   undergoes regular yield adjustments in line with money market conditions at least every 397 days.

1. (1)

   4A money-market instrument will be regarded as liquid if it can be sold at limited cost in an adequately short timeframe.

2. (2)

   A money-market instrument will be regarded as having a value which can be accurately determined at any time if accurate and reliable valuations systems, which fulfil the following criteria, are available:

   1. (a)

      enabling the firm to calculate a net asset value in accordance with the value at which the instrument held in the portfolio could be exchanged between knowledgeable willing parties in an arm's length transaction; and

   2. (b)

      based either on market data or on valuation models, including systems based on amortised costs.

3. (3)

   A money-market instrument that is normally dealt in on the money market and is admitted to, or dealt in, on an eligible market will be presumed to be liquid and have a value which can be accurately determined at any time, unless there is information available to the firm that would lead to a different determination.

4A permitted stock lending transaction is one which, for a Solvency II firm, satisfies the requirements in COBS 21.3.11 R to COBS 21.3.12 R and, for an insurer which is not a Solvency II firm, satisfies INSPRU 3.2.36A R to INSPRU 3.2.42 G.

4The specific method of stock lending permitted is an arrangement of the kind described in section 263B of the Taxation of Chargeable Gains Act 1992, under which the lender transfers securities to the borrower other than by way of sale and the borrower is to transfer those securities, or securities of the same type and amount, back to the lender at a later date. In accordance with good market practice, a separate transaction by way of transfer of assets is also involved for the purpose of providing collateral to the "lender" to cover him against the risk that the future transfer back of the securities may not be satisfactorily completed.

1. (1)

   4The stock lending arrangement is of the kind described in section 263B of the Taxation of Chargeable Gains Act 1992 (without extension by section 263C), and:

   1. (a)

      all the terms of the agreement under which securities are to be reacquired by the firm for the account of the unit-linked fund are in a form which is acceptable to the firm and in accordance with good market practice;

   2. (b)

      the counterparty is:

      1. (i)

         an authorised person; or

      2. (ii)

         a person authorised by a Home State regulator; or

      3. (iii)

         a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America; or

      4. (iv)

         a bank, or a branch of a bank, supervised and authorised to deal in investments as principal, with respect to OTC derivatives, by at least one of the following federal banking supervisory authorities of the United States of America:

         1. (A)

            the Office of the Comptroller of the Currency;

         2. (B)

            the Federal Deposit Insurance Corporation;

         3. (C)

            the Board of Governors of the Federal Reserve System; and

         4. (D)

            the Office of Thrift Supervision; and

   3. (c)

      collateral is obtained to secure the obligation of the counterparty under the terms in (a) and the collateral is:

      1. (i)

         acceptable to the firm;

      2. (ii)

         adequate; and

      3. (iii)

         sufficiently immediate; and

   4. (d)

      for the purposes of property-linked assets only:

      1. (i)

         where the linked policyholder bears the whole of the risk associated with the stock lending transaction, the linked policyholder receives the whole of the recompense (net of fees and expenses);

      2. (ii)

         the extent of any risk that the linked policyholder bears in relation to the stock lending transaction is disclosed to them; and

      3. (iii)

         where the risk associated with the stock lending transaction is borne outside the linked fund, the linked fund receives a fair and reasonable recompense for the use of the linked policyholders' funds.

2. (2)

   The counterparty for the purpose of (1) is the person who is obliged under the agreement in (1)(a) to transfer to the firm the securities transferred by the firm under the stock lending arrangement or securities of the same kind.

3. (3)

   COBS 21.3.11R (1)(c) does not apply to a stock lending transaction made through Euroclear Bank SA/NV’s Securities Lending and Borrowing Programme.

1. (1)

   4Collateral is adequate for the purposes of this section only if it is:

   1. (a)

      transferred to the firm or the firm's agent;

   2. (b)

      at least equal in value, at the time of the transfer to the firm or its agent, to the value of the securities transferred by the firm; and

   3. (c)

      in the form of one or more of:

      1. (i)

         cash;

      2. (ii)

         a certificate of deposit;

      3. (iii)

         a letter of credit;

      4. (iv)

         a readily realisable security;

      5. (v)

         commercial paper with no embedded derivative content;

      6. (vi)

         a qualifying money market fund.

2. (2)

   Collateral is sufficiently immediate for the purposes of this section if:

   1. (a)

      it is transferred before or at the time of the transfer of the securities by the firm; or

   2. (b)

      the firm takes reasonable care to determine at the time referred to in (a) that it will be transferred at the latest by the close of business on the day of the transfer.

3. (3)

   The firm must ensure that the value of the collateral at all times is at least equal to the value of the securities transferred by the firm.

4. (4)

   The duty in (3) may be regarded as satisfied in respect of collateral the validity of which is about to expire, or has expired, where the firm takes reasonable care to determine that sufficient collateral will be transferred, at the latest, by the close of business on the day of expiry.

4A permitted derivatives contract is one which:

1. (1)

   for a Solvency II firm, is effected or issued:

   1. (a)

      on or under the rules of a regulated market; or

   2. (b)

      off-market with an approved counterparty; and

   satisfies COBS 21.3.14 G; and

2. (2)

   for an insurer which is not a Solvency II firm, satisfies INSPRU 3.2.5 R to INSPRU 3.2.35A G with the exception of INSPRU 3.2.18 R; and

3. (3)

   in each of (1) and (2) the provisions are applied in relation to assets covering liabilities in respect of linked long-term contracts of insurance.