1This chapter provides guidance in relation to business transfers.

1. (1)

   SUP 18.2 applies to any firm or to anymember of Lloyd's proposing to transfer the whole or part of its business by an insurance business transfer scheme or to accept such a transfer. SUP 18.2.31 G to SUP 18.2.41 G also applyto the independent expert making the scheme report.

2. (2)

   SUP 18.3 applies to any firm proposing to accept certain transfers of insurance business taking place outside the United Kingdom.

3. (3)

   SUP 18.4 applies to any friendly societies proposing to amalgamate under section 85 of the Friendly Societies Act 1992, to any friendly society proposing to transfer engagements under section 86 of that Act to another body and to any body (whether or not it is a friendly society) proposing to accept such a transfer. SUP 18.4 also provides guidance to those wishing to make representations to the FSA about an application for confirmation of an amalgamation or transfer.

Guidance on building society transfers and mergers is given in the Building Societies Regulatory Guide2.

Insurance business transfers are subject to Part VII of the Act and must be approved by the court under section 111. The Financial Services and Markets Act 2000 (Control of Business Transfers)(Requirements on Applicants) Regulations 2001 (SI 2001/3625) also apply. These regulations set out minimum requirements for publicising schemes, notifying certain interested parties directly (subject to the discretion of the court), and giving information to anyone who requests it.

An insurance business transfer scheme is defined in section 105 of the Act and the definition has been extended to transfers from members of Lloyd's to reflect the effect of the Financial Services and Markets Act 2000 (Control of Transfers of Business Done at Lloyd's) Order 2001(SI 2001/3626). With certain exclusions (relating to some schemes approved under foreign legislation, some novations of reinsurance or some captive insurers), it includes, in broad terms, any scheme to transfer insurance business from one firm (other than a friendly society) or members of Lloyd's to another body (which may be a friendly society), if:

1. (1)
   1. (a)

      the transferor is an "UK authorised person" and the business is being carried on in one or more EEA States; or

   2. (b)

      the business is reinsurance carried on in the United Kingdom; or

   3. (c)

      the business is carried on in the United Kingdom and the transferor is not an EEA firm; and

2. (2)

   in each case, the transferred business will be carried on from an establishment in the EEA.

The business transferred may include liabilities and potential liabilities on expired policies, liabilities on current policies and liabilities on contracts to be written in the period until the transfer takes effect. The parties to schemes approved under foreign legislation or involving novations of reinsurance or a captive insurer can apply to the court for an order sanctioning the scheme.

In the opinion of the FSA, a novation or a number of novations would constitutean insurance business transfer only if their number or value were such that the novation was to be regarded as a transfer of part of the business. A novation is an agreement between the policyholder and two insurers whereby a contract with one insurer is replaced by a contract with the other. In the opinion of the FSA, where an insurer agrees to meet the liabilities (this may include undertaking the administration of the policies) of another insurer by means of a reinsurance contract, including Lloyd's reinsurance to close, this would not constitute an insurance business transfer because the contractual liability remains with the original insurer; nor would an arrangement whereby an insurer offers to renew the policies of another insurer on their expiry date.

Under section 112 of the Act, the court has wide discretion to transfer property and liabilities to the transferee and to make orders in relation to incidental, consequential and supplementary matters. In the opinion of the FSA, the court has the power in such cases and on such terms as may be appropriate, to transfer the benefit of reinsurance contracts protecting the transferred business and to make such amendments to the terms of those contracts as may be necessary to give effect to that transfer of benefit.

Amalgamations of friendly societies and transfers of engagements from friendly societies to other bodies (whether or not friendly societies) are governed by part VIII of the Friendly Societies Act 1992 and Schedule 15 to that Act applies.

Transfers enable firms to manage their affairs more effectively, both for their own benefit and for that of their customers. However they represent an interference in the contracts between a firm and its customers, unless the customers individually consent,, and may also affect the rights of third parties. An important protection is the requirement for the consent of the court. Under section 110 of the Act, the FSA is entitled to be heard by the court. In deciding whether it should appear, the FSA will consider the potential risk to its regulatory objectives of the scheme compared to not implementing the scheme.

The FSA's regulatory objectives include market confidence, financial stability5 and the protection of consumers. Any or all5 of these might be impaired if a transfer were approved that led to loss, or perceived loss, to consumers or other market participants. On the other hand a transfer that led to improved security or benefits for consumers would promote the FSA's regulatory objectives. When considering a transfer, the FSA needs to take into account the interests of existing consumers of the transferee and of consumers remaining with the transferor as well as of those whose contracts are being transferred. The guidance in this section is intended to protect consumers. By so doing it promotes the market confidence objective.

Under section 5(2) of the Act, in considering what degree of protection may be appropriate for consumers, the FSA must have regard to their need for accurate information. Under Principle 7, a firm must pay due regard to the information needs of clients (the scope of the Principle is not precisely consumers). The extent and nature of the information provided to consumers about a proposed scheme will therefore be a factor for the FSA in determining its attitude to the scheme. For the court process to be an effective protection, consumers and others affected need to learn of the proposed transfer and receive sufficient information on the transfer and its effects in such a form as to enable them to decide if they are likely to be adversely affected, and whether they wish to be heard by the court. The information needed depends on the circumstances and cannot be precisely specified in advance but this chapter contains guidance aimed at ensuring that consumers, the FSA and the court receive adequate information.

Under Principle 11, a firm must deal with the FSA in an open and cooperative way and disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice. This chapter contains guidance on the information that the FSA expects to receive from firms and members of Lloyd's in the context of insurance business transfer schemes.

Under Principle 6, a firm must treat customers fairly (the scope of the Principle is not precisely consumers) and, under Principle 8, manage conflicts of interest fairly. A criterion for the FSA in considering a proposed scheme would be whether it appears that either Principle is not being followed. Transfers may have both positive and negative effects on individual consumers. In such circumstances it is for consumers to balance these effects and assess whether the proposed scheme as a whole is in their interests and whether to make representations to the court about the scheme. The FSA's main concern then becomes to ensure that consumers have appropriate information and not to set its judgment over theirs.

A scheme may have a material effect on the transferor or the transferee. The FSA will take any scheme into account in its future regulation of the firms, where it continues to regulate them. This could include, for instance, the exercise of own-initiative powers under section 45 of the Act to vary a firm's Part IV permission, for instance, by requiring a scheme of operations (SUP 7 contains guidance on criteria for varying a firm's Part IV permission).

For many transfers it is necessary to cooperate with overseas regulators. This section contains guidance on such cooperation.

Section 86(8) of the Friendly Societies Act 1992 requires, where a transferee is a friendly society, that consent to accept the engagements is passed by special resolution in accordance with paragraph 7 of Schedule 12 to that Act. This section includes guidance about the information needed in these circumstances.

Under section 109 of the Act, an insurance business transfer scheme must be accompanied by a scheme report in a form approved by the FSA. This section contains guidance on the form of a scheme report.

Also under section 109 of the Act, the scheme report must be made by a person nominated or approved by the FSA. This section contains guidance on the procedures and general criteria that the FSA proposes to adopt for this purpose.

The FSA has a duty under section 2(3) of the Act "to have regard to the need to use its resources in the most efficient and economic way". The extent to which (if at all) it examines and considers the details of a scheme and the resources it devotes to such consideration will depend on the potential risk to its regulatory objectives.

When an insurance business transfer scheme is being considered, the scheme promoters (including the transferor and, except possibly if it is a new company, the transferee) should discuss the scheme with the FSA as soon as reasonably practical, to enable the FSA to consider what issues are likely to arise, and to enable a practical timetable for the scheme to be agreed. The FSA will wish to consider material issues relating to policyholder rights (such as the reasonable expectations of with-profits policyholders) or policyholder security at the earliest opportunity. In any case the FSA will need time to:

1. (1)

   consider the application, if an application by the transferee for a Part IV permission or a variation of permission is necessary (SUP 6 provides3guidance on this);

   33
2. (2)

   seek information or approvals from other supervisors (where this applies);

3. (3)

   consider what skills are needed to make a proper report on the scheme and what criteria should therefore be applied to the choice of independent expert;

4. (4)

   consider whether the promoters' nominee for independent expert is suitable for approval or, if the FSA proposes to nominate someone, who the FSA should nominate; and

5. (5)

   consider whether to object to the scheme in the light of the report and other circumstances.

The initial information on the schemeprovided to the FSA under SUP 18.2.12 G should include its broad outline and its purpose.The FSA will indicate to the promoters how closely it wishes to monitor the progress of the scheme, including the extent to which it wishes to see draft documentation.

Under section 109(2) of the Act a scheme report may only be made by a person:

1. (1)

   appearing to the FSA to have the skills necessary to enable him to make a proper report; and

2. (2)

   nominated or approved for the purpose by the FSA.

The general principles set out in SUP 5.4.8 G, for suitability of a skilled person, apply also to the independent expert. The FSA expects the independent expert making the scheme report to be a natural person, who:

1. (1)

   is independent, that is any direct or indirect interest or connection he has or has had in either the transferor or transferee should not be such as to prejudice his status in the eyes of the court; and

2. (2)

   has relevant knowledge, both practical and theoretical, and experience of the types of insurance business transacted by the transferor and transferee.

For a transfer of long-term insurance business the independent expert should be an actuary familiar with the role and responsibilities of the actuarial function holder and (if the relevant insurance business includes with-profits insurance business) a with-profits actuary.2

For a transfer of general insurance business the independent expert should normally be competent at assessing technical provisions and the uncertainties of the liabilities they represent (such as an actuary). Exceptionally, where issues other than the ability of the transferee to meet the liabilities to be transferred are much more significant in assessing the likely effects of the scheme, this criterion might not be applied. In such a case the independent expert would be expected to take advice from an appropriately qualified practitioner about the adequacy of the financial resources of the transferee.

The independent expert would not normally be expected to be knowledgeable:

1. (1)

   about general insurance business if the business being transferred is long-term insurance business only; nor

2. (2)

   about long-term insurance business if the business being transferred is general insurance business only;

but, where either the transferor or transferee is a composite, he should understand the relevance of the general insurance business to the security of the long-term insurance business policyholders and vice versa and may need to seek independent specialist advice.

The suitability of a person to act as an independent expert depends on the nature of the scheme and the firms concerned. On the basis of the preliminary information supplied by the scheme promoters (and any other knowledge it has of the circumstances and the firms), the FSA will consider what skills are needed to make a proper report on the scheme and what criteria should therefore be applied to the choice of independent expert. The FSA will inform the promoters of any such criteria it is minded to apply.

Under section 107(2) of the Act, the application to the court may be made by the transferor or the transferee or both. As soon as reasonably practical, the intended applicant should choose their nominee for independent expert in the light of any criteria advised by the FSA and advise the FSA of their choice, unless the FSA wishes them to defer nomination or to make its own nomination. The notification should be accompanied by reasons why the party considers the nominee to be a suitable person to act as independent expert, together with relevant details of his experience and qualifications.

The FSA may wish to have preliminary discussions with the nominee about the transfer to help the FSA determine whether he is suitably qualified to address issues arising from the transfer. The FSA will consider the suitability of the nominee and inform the firm that nominated him whether it approves him. Since the nature of the scheme is a factor in determining the suitability of the nominee, the FSA cannot approve a nominee before the broad outlines of the scheme have been determined. If the FSA rejects a nominee, it will normally inform him and, with the agreement of the nominee, the applicant of the reasons for the rejection.

The FSA may itself nominate the independent expert, either where it indicates that a nomination is not required by the parties, or where it does not approve the parties' own nomination. In either case it will inform the promoters of its nominee.

Firms should co-operate fully with the independent expert and provide him with access to all relevant information and appropriate staff.

The guidance set out in SUP 18.2.25 G to SUP 18.2.30 G derives from the requirements of the Insurance Directives and the associated agreements between EEA regulators. Schedule 12 of the Act implements some of these requirements.

1. (1)

   If the transferee is (or will be) an EEA firm (authorised in its Home State to carry on insurance business under the Insurance Directives) or a Swiss general insurance company, then the FSA has to consult the transferee's Home State regulator, who has 3 months to respond. It will be necessary for the FSA to obtain from the transferee's Home State regulator a certificate confirming that the transferee will meet the Home State's solvency margin requirements (if any) after the transfer.

2. (2)

   If the transferee is authorised in the United Kingdom, the FSA will need to certify that the transferee will meet its solvency margin requirements after the transfer. If the FSA has required of a UK firm a financial recovery plan of the kind mentioned in paragraph 1 of article 38 of the Life Directive(2002/83/EC) or paragraph 1 of article 20a of the First Non-Life Directive, the FSA will not issue a certificate for so long as it considers that policyholders' rights are threatened within the meaning of paragraph 1.

The transferor will need to provide the FSA with the information that the Home State regulator requires from FSA. This information includes:

1. (1)

   the transfer agreement or a draft, with:

   1. (a)

      the names and addresses of the transferor and transferee; and

   2. (b)

      the classes of insurance business and details of the nature of the risks or commitments to be transferred;

2. (2)

   for the business to be transferred (both before and after reinsurance):

   1. (a)

      the amount of technical provisions;

   2. (b)

      the amount of premiums (in the most recent financial period); and

   3. (c)

      for general insurance business, the claims incurred (in the most recent financial period);

3. (3)

   details of assets to be transferred;

4. (4)

   details of any guarantees (including reinsurance), whether provided by the transferor or a third party, to protect the provisions for the business transferred against deterioration; and

5. (5)

   the states of the risks or the states of the commitments being transferred.

If the transferee is not (and will not be) authorised and will be neither an EEA firm nor a Swiss general insurance company, then the FSA will need to consult itsinsurance supervisor in the place where the business is to be transferred. The FSA will need confirmation from this supervisor that the transferee will meet his solvency margin requirements there (if any) after the transfer.

If the transferor is an UK insurer and the business to be transferred includes business carried on from a branch in another EEA State, then the FSA has to consult the Host State regulator, who has 3 months to respond. The FSA will need to be given the information that the Host State regulator requires from it. This information should identify the parties to the transfer and include the transfer agreement or draft transfer agreement or a summary containing relevant information, and describe arrangements for settling claims if the branch is to be closed.

If the transferor is anUK insurer and the business to be transferred includes a long-term insurance contract (other than reinsurance) for which the state of the commitment is an EEA state other than the United Kingdom, then the FSA has to consult the Host State regulator. If the transferor is anUK insurer and the business to be transferred includes a general insurance contract (other than reinsurance) for which the state of the risk is an EEA state other than the United Kingdom, then the FSA must consult the Host State regulator. The FSA will need to be given the information that the Host State regulator requires from it. This information should identify the parties to the transfer and include the transfer agreement or draft transfer agreement or a summary containing relevant information. It would be helpful (especially for long-term insurance business) if a draft of the scheme report was also available. The consent of the Host State regulator to the transfer is required, unless he does not respond within 3 months.

Where the transferor is anUK-deposit insurer and, following the transfer, it will no longer be carrying on insurance business in the United Kingdom, the FSA will need to collaborate with regulatory bodies in the other EEA States in which it is carrying on business to ensure that effective supervision of the business carried on in the EEA continues. The transferor should cooperate with the FSA and the other regulatory bodies in this process and demonstrate that it will meet the requirements of its regulators following the transfer.

Under section 109 of the Act, a scheme report must accompany an application to the court to approve an insurance business transfer scheme. This report must be made in a form approved by the FSA. The FSA would not expect to approve the form of a scheme report unless it complies with SUP 18.2.33 G and would expect to approve the form of a scheme report that complies. SUP 18.2.32 G and SUP 18.2.34 G to SUP 18.2.41 G provide additional guidance for the independent expert.

There may be matters relating to the scheme or the parties to the transfer that the FSA wishes to draw to the attention of the independent expert. The FSA may also wish the report to address particular issues. The independent expert should therefore contact the FSA at an early stage to establish whether there are such matters or issues. The independent expert should form his own opinion on such issues, which may differ from the opinion of the FSA.

The scheme report should comply with the applicable rules on expert evidence and contain the following information:

1. (1)

   who appointed the independent expert and who is bearing the costs of that appointment;

2. (2)

   confirmation that the independent expert has been approved or nominated by the FSA;

3. (3)

   a statement of independent expert's professional qualifications and (where appropriate) descriptions of the experience that fits him for the role;

4. (4)

   whether the independent expert has, or has had, direct or indirect interest in any of the parties which might be thought to influence his independence, and details of any such interest;

5. (5)

   the scope of the report;

6. (6)

   the purpose of the scheme;

7. (7)

   a summary of the terms of the scheme in so far as they are relevant to the report;

8. (8)

   what documents, reports and other material information the independent expert has considered in preparing his report and whether any information that he requested has not been provided;

9. (9)

   the extent to which the independent expert has relied on:

   1. (a)

      information provided by others; and

   2. (b)

      the judgment of others;

10. (10)

    the people on whom the independent expert has relied and why, in his opinion, such reliance is reasonable;

11. (11)

    his opinion of the likely effects of the scheme on policyholders (this term is defined to include persons with certain rights and contingent rights under the policies), distinguishing between:

    1. (a)

       transferring policyholders;

    2. (b)

       policyholders of the transferor whose contracts will not be transferred; and

    3. (c)

       policyholders of the transferee;

12. (12)

    what matters (if any) that the independent expert has not taken into account or evaluated in the report that might, in his opinion, be relevant to policyholders' consideration of the scheme; and

13. (13)

    for each opinion that the independent expert expresses in the report, an outline of his reasons.

The purpose of the scheme report is to inform the court and the independent expert therefore has a duty to the court. However reliance will also be placed on it by policyholders, by others affected by the scheme and by the FSA. The amount of detail that it is appropriate to include will depend on the complexity of the scheme, the materiality of the details themselves and the circumstances. For instance where it is clear that no-one will be adversely affected by the transfer, a simple explanation for this conclusion plus the details required by SUP 18.2.33 G might be an adequate report.

The summary of the terms of the scheme should include:

1. (1)

   a description of any reinsurance arrangements that it is proposed should pass to the transferee under the scheme; and

2. (2)

   a description of any guarantees or additional reinsurance that will cover the transferred business or the business of the transferor that will not be transferred.

The independent expert's opinion of the likely effects of the scheme on policyholders should:

1. (1)

   include a comparison of the likely effects if it is or is not implemented;

2. (2)

   state whether he considered alternative arrangements and, if so, what;

3. (3)

   where different groups of policyholders are likely to be affected differently by the scheme, include comment on those differences he considers may be material to the policyholders; and

4. (4)

   include his views on:

   1. (a)

      the effect of the scheme on the security of policyholders' contractual rights, including the likelihood and potential effects of the insolvency of the insurer;

   2. (b)

      the likely effects of the scheme on matters such as investment management, new business strategy, administration, expense levels and valuation bases in so far as they may affect:

      1. (i)

         the security of policyholders' contractual rights;

      2. (ii)

         levels of service provided to policyholders; or

      3. (iii)

         for long-term insurance business, the reasonable expectations of policyholders; and

   3. (c)

      the cost and tax effects of the scheme, in so far as they may affect the security of policyholders' contractual rights, or for long-term insurance business, their reasonable expectations.

The independent expert is not expected to comment on the likely effects on new policyholders, that is, those whose contracts are entered into after the effective date of the transfer.

For any mutual company involved in the scheme, the report should:

1. (1)

   describe the effect of the scheme on the proprietary rights of members of the company, including the significance of any loss or dilution of the rights of those members to secure or prevent further changes which could affect their entitlements as policyholders;

2. (2)

   state whether, and to what extent, members will receive compensation under the scheme for any diminution of proprietary rights; and

3. (3)

   comment on the appropriateness of any compensation, paying particular attention to any differences in treatment between members with voting rights and those without.

For a scheme involving long-term insurance business, the report should:

1. (1)

   describe the effect of the scheme on the nature and value of any rights of policyholders to participate in profits;

2. (2)

   if any such rights will be diluted by the scheme, how any compensation offered to policyholders as a group (such as the injection of funds, allocation of shares, or cash payments) compares with the value of that dilution, and whether the extent and method of its proposed division is equitable as between different classes and generations of policyholders;

3. (3)

   describe the likely effect of the scheme on the approach used to determine:

   1. (a)

      the amounts of any non-guaranteed benefits such as bonuses and surrender values; and

   2. (b)

      the levels of any discretionary charges;

4. (4)

   describe what safeguards are provided by the scheme against a subsequent change of approach to these matters that could act to the detriment of existing policyholders of either firm;

5. (5)

   include the independent expert's overall assessment of the likely effects of the scheme on the reasonable expectations of long-term insurance businesspolicyholders;

6. (6)

   state whether the independent expert is satisfied that for each firm the scheme is equitable to all classes and generations of its policyholders; and

7. (7)

   state whether, in the independent expert's opinion, for each relevant firm the scheme has sufficient safeguards (such as principles of financial management or certification by a with-profits actuary or actuarial function holder2) to ensure that the scheme operates as presented.

   2

Where the transfer forms part of a wider chain of events or corporate restructuring, it may not be appropriate to consider the transfer in isolation and the independent expert should seek sufficient explanations on corporate plans to enable him to understand the wider picture. Likewise he will need information on the operational plans of the transferee and, if only part of the business of the transferor is transferred, of the transferor. These will need to have sufficient detail to allow him to understand in broad terms how the business will be run. He would not normally be expected to assess the adequacy of systems and controls in detail.

A transfer may provide for benefits to be reduced for some or all of the policies being transferred. This might happen if the transferor is in financial difficulties. If there is such a proposal, the independent expert should report on what reductions he considers ought to be made, unless either:

1. (1)

   the information required is not available and will not become available in time for his report, for instance it might depend on future events; or

2. (2)

   otherwise, he is unable to report on this aspect in the time available.

Under such circumstances, the transfer might be urgent and it might be appropriate for the reduction in benefits to take place after the event, by means of an order under section 112 of the Act. The FSA would wish to consider the fairness of any such reduction and section 113 allows the court to appoint an independent actuary to report to the FSA on any such post-transfer reduction in benefits.

Under the Financial Services and Markets Act 2000 (Control of Business Transfers)(Requirements on Applicants) Regulations 2001 (SI 2001/3625), unless the court directs otherwise, notice of the application must be sent to all policyholders of the parties. It may also be appropriate to give notice to others affected, in particular to:

1. (1)

   reinsurers of the transferor where it is proposed that benefits or liabilities under their contracts should pass to the transferee; and

2. (2)

   anyone with an interest in the policies being transferred who has notified the transferor of their interest.

The regulations referred to in SUP 18.2.42 G require that notice of the application must be published in:

1. (1)

   the London, Edinburgh and Belfast Gazettes; and

2. (2)

   unless the court directs otherwise, in:

   1. (a)

      two national newspapers in the United Kingdom; and

   2. (b)

      in two national newspapers in any other EEA State that is the state of the risk or the state of the commitment.

Wider publication may be appropriate in some circumstances (especially if not all policyholders are sent notices).

The regulations referred to in SUP 18.2.44 G require that the FSA approves in advance the notices sent to policyholders and published in the press.

Where a transfer involves members of Lloyd's as transferor or transferee, any notice requirements of the Society will also apply.

The FSA is entitled to be heard by the court on any application for a transfer. A consideration for the FSA in determining whether to oppose a transfer would be itsview on whether adequate steps had been taken to tell policyholders about the transfer and whether they had adequate information and time to consider it. The FSA would not normally consider adequate a period of less than six weeks between sending notices to policyholders and the date of the court hearing. Therefore it would be sensible, before requesting the court fora waiver of the publication requirements or the requirement to send statements direct to policyholders, to consult the FSA on its views about what waivers might be appropriate and what substitute arrangements might be made. The FSA will take into account the practicality and costs of sending notices to policyholders (especially for firms in financial difficulty), the likely benefits for policyholders of receiving notices and the efficacy of other arrangements proposed for informing policyholders (including additional advertising or, where appropriate, electronic communication). For instance, the FSA would be unlikely to object to a transfer on the grounds that policyholders had not been sent notices, if cover for the policies concerned had expired and the probability of them making a claim was so small as to make the sending disproportionately expensive (particularly if there had been additional advertising). A firm may not be able to send notices to some or all of its policyholders, because it does not have their address, or may not even know their identity. This situation is not uncommon for business written through brokers or other agents. In such a case, alternative ways of informing policyholders need to be considered.

As the consent (or presumed consent) of the Host State is required for a transfer covering contracts for which another EEA State is the state of the risk (for general insurance business) or the state of the commitment (for long-term insurance business), it is advisable to obtain the consent of regulatory body in the Host State to any waiver of publication in that state. The approval of the court will still be required.

It would normally be appropriate to include with the notice referred to in SUP 18.2.42 G a statement setting out the terms of the scheme and containing a summary of the scheme report. Ideally every recipient should understand in broad terms from the summary how the scheme is likely to affect him. This objective will be most nearly achieved if the summary is clear and concise while containing sufficient detail for the purpose. A lengthy summary or one that was hard to understand would not be appropriate. Regulations require the scheme report, the notice and the statement to be made available to anyone requesting them. The internet can be used for this purpose if it is suitable for the person making the request.

Where the transferee is a friendly society, the notice should include information about the meeting at which a special resolution in accordance with paragraph 7 of Schedule 12 to the Friendly Societies Act 1992 is to be voted on, including the date of the meeting, how notice of the meeting is to be given to members and the terms of the special resolution. After the meeting the friendly society should inform the FSA whether the special resolution has been passed. The court will also need to be informed, so an appropriateway of informing the FSA may be to include it in the affidavit to the court.

The FSA should be given the opportunity to comment on the statement referred to in SUP 18.2.48 G before it is sent, unless the FSA has informed the promoters in writing that it does not wish to do so.

The assessment is a continuing process, starting when the scheme promoters first approach the FSA about a proposed scheme. Among the considerations that may be relevant to both the depth of consideration given to, and the FSA's opinion on, a scheme are:

1. (1)

   the potential risk posed by the transfer to the regulatory objectives;

2. (2)

   the purpose of the scheme;

3. (3)

   how the security of policyholders' (who include persons with certain rights and contingent rights under the policies) contractual rights appears to be affected;

4. (4)

   how the scheme compares with possible alternatives, particularly those that do not require approval (whether by the court or the FSA);

5. (5)

   how policyholders' rights and reasonable expectations appear to be affected;

6. (6)

   the compensation offered to policyholders for any loss of rights or expectations;

7. (7)

   how for other persons (besides policyholders) who have an interest in policies, their rights and the security of those rights appear to be affected;

8. (8)

   the opportunity given to policyholders to consider the scheme, that is whether they have been properly notified, whether they have had adequate information and whether they have had adequate time to consider that information;

9. (9)

   the opinion of the independent expert;

10. (10)

    for a transfer that involves members of Lloyd's as transferor or transferee, the effect on the Society;

11. (11)

    the views of other regulatory bodies consulted in connection with the proposed transfer; and

12. (12)

    any views expressed by policyholders.

The scheme report will be an important factor in the view the FSA forms on a scheme. The FSA will place considerable reliance on the opinions of the independent expert and the reasons for them. However it will form its own view taking into account other information and having regard to its regulatory objectives.

The FSA is likely to object to a scheme if it concludes that it is unfair to a class of policyholders, unless the policyholders of that class have approved the scheme on the basis of information the FSA considers clear and accurate. Policyholders are not required to vote on a scheme but would, for instance, normally vote on a demutualisation or on a scheme of arrangement under the Companies Act 20064. The FSA is also likely to object to a scheme if it concludes that it has a material adverse effect on policyholders' security. The FSA may wish to satisfy itself that questions of systems and controls are properly addressed. There may also be conduct of business issues, particularly if the market has not fully absorbed the impact of the scheme by its effective date. The FSA would seek to resolve such issues through discussion with the scheme promoters in advance of the application to the court for approval, giving them the opportunity to amend the scheme or documentation, or otherwise to allay the FSA's concerns. Scheme promoters should keep the FSA informed to allow this discussion.

The FSA may exercise its other powers under the Act, if it considers this a more effective method of achieving its regulatory objectives.

The FSA is not required under its regulatory objectives to object to a scheme merely because some other scheme might have been in the better interests of policyholders, if the scheme itself is not adverse to their interests. However there may be circumstances where treating customers fairly would require a firm to consider or to implement an alternative scheme.

Where a transfer involves members of Lloyd's as transferor or transferee, the FSA will consult the Society. Where the business of a syndicate is being transferred, the transfer involves all members participating in the relevant syndicate years.

Regulations require that copies of the application to the court, the scheme report and the statement for policyholders referred to in SUP 18.2.48 G are also given to the FSA. This enables the FSA to consider these and determine whether it wishes to be heard by the court. It might assist the FSA if these items were given to the FSA in draft, in the first instance. This would enable:

1. (1)

   the FSA to seek clarification before the documents were finalised; and

2. (2)

   if the promoters so choose, allow them to amend the scheme to meet any concerns of the FSA.

For long-term insurance business, the affidavit evidence to the court would normally include copies of reports on the transfer by the actuarial function holder and (if the insurance business includes with-profits business) the with-profits actuary of 2both firms, which should be provided to the FSA at an early stage. SUP 4.3.17 R (4) requires a firm to request the advice of its with-profits actuary2 about the likely effect of material changes in its business plans on the 2rights and reasonable expectations of the relevant classes of its with-profits policyholders. A transfer would be material unless the liabilities transferred were not material relative to the total liabilities of the firm. The advice on a transfer would normally be in the form of a formal report by the 1with-profits actuary.2

The scheme promoters should advise the FSA about any material representations made to them in response to the transfer scheme. Where it is proposed that reinsurance arrangements should pass to the transferee under the scheme, the FSA should also be informed about the steps being taken to consult with, or seek the consent of, the reinsurers and the reactions received.

The court is likely to wish to know the FSA's opinion on the scheme and, if the FSA does not intend to be heard, the affidavit may include a summary of the views expressed by the FSA. The applicants to the court should provide the FSA with a copy of all the affidavit evidence that they intend to submit to the court.

Under section 115 of the Act, the FSA has the power to give a certificate confirming that a firm possesses any required minimum margin, to facilitate an insurance business transfer to the firm under overseas legislation from a firm authorised in another EEA State or from a Swiss general insurance company. This section provides guidance on how the FSA would exercise this power and on related matters.

Under cooperation agreements between EEA regulators, if it has serious concerns about the proposed transferee, the FSA should inform the regulatory body of the transferor within 3 months of the original request from that regulatory body. The FSA is not obliged to reply, but if it does not, its opinion is taken to be favorable. Although the protocol does not apply to Switzerland, the FSA is required to cooperate with the Swiss regulatory body and would apply similar principles to a proposed transfer from a Swiss general insurance company.

The information that the regulatory body of the transferor is required to supply will normally be sufficient for the FSA to determine whether the transfer is likely to have a material effect on the transferee.

If the effect of the transfer is not likely to be material and the FSA does not already have serious concerns about the transferee, the FSA can reply favorably.

If the effect of the transfer may be material, the FSA will need to consider whether to request a scheme of operations or other information from the proposed transferee to assist in determining whether the likely effect of the transfer is such that the FSA should have serious concerns.

If the effect of the transfer may have a material adverse effect on the transferee or the security of policyholders, the FSA will consider whether it is appropriate to exercise its powers under the Act to achieve its regulatory objectives.

It is for the committee of management of a friendly society to decide whether to recommend an amalgamation or a transfer of engagements to the society's members. This section provides some guidance on the procedures to be followed and the information to be provided to a friendly society's members so that they are appropriately informed before they exercise their right to vote on the proposals.

Friendly societies are encouraged to discuss a proposed transfer or amalgamation with the FSA, at an early stage to help ensure that a workable timetable is developed. This is particularly important where there are notification requirements for supervisory authorities in EEA States other than the United Kingdom, or for an amalgamation where additional procedures are required.

The FSA will want to satisfy itselfthat after an amalgamation or a transfer the business will be prudently managed and continue to comply with the Principles. It may therefore require prudential information to be provided. It may request prudential information at an early stage to provide itself with adequate time to assess the information.

For a transfer to another friendly society, if the conditions of 87(1) and 87(2) of the Friendly Societies Act 1992 are met a report is required from the appropriate actuary of the transferee to confirm that it will meet the required minimum margin. Where the conditions of 87(1) and 87(3) are met the FSA may require a report from the appropriate actuary of the transferee to confirm that it will have an excess of assets over liabilities.

For a transfer of long-term insurance business, the FSA may, under section 88 of the Friendly Societies Act 1992, require a report from an independent actuary on the terms of the proposed transfer and on his opinion of the likely effects of the transfer on long-term policyholder members of either the transferor or (if it is a friendly society) the transferee. A summary is included in the statement sent to members (see SUP 18.4.13 G) and the full report is required to be made available to anyone on payment of a reasonable fee. The general principles in SUP 18.2.32 G to SUP 18.2.40 G apply to the independent actuary's report.

Under the Friendly Societies Act 1992 the FSA may not confirm a transfer of engagements unless it is satisfied that the transfer is in the interests of the members of each friendly society participating in the transfer (see SUP 18.4.25 G (2)(b)). Itwill therefore ask that the participating societies' actuaries confirm that the transfer is in the interests of the members.

Under the Friendly Societies Act 1992, members will normally have the opportunity to vote on a proposed transfer or amalgamation (SUP 18.4.11 G and SUP 18.4.12 G describe exceptions). A friendly society has to ensure that, before casting their votes, its members are clearly and fully informed of the terms on which the amalgamation or transfer of engagements is to take place and that they have all the information needed to understand how their interests will be affected. If the society's rules permit, delegates can vote except on an "affected members' resolution" under section 86. The FSA may not confirm an amalgamation or a transfer if it considers that information material to the members' decision was not made available to all the members eligible to vote.

Amendments to a friendly society's registered rules may be necessary to permit a transfer to it. The FSA will need to be consulted in the usual way about registration of the appropriate rules. Similarly for an amalgamation, each of the amalgamating societies has to approve the memorandum and rules of the new society and the requirements of schedule 3 to the Friendly Societies Act 1992 have to be met. It will be necessary to allow adequate time for these processes.

For an amalgamation the successor society, and for a transfer the transferee, may need to apply for permission, or to vary its permission, under Part IVof the Act. The FSA will need time before confirming a transferto consider whether any necessary permission or variation should be given. If the transferee is an EEA firm or a Swiss general insurance company, then confirmation will be needed from its Home State regulator that it meets the Home State's solvency margin requirements (see SUP 18.4.25 G (3)).

It is likely that the information sent to members will include a statement explaining the reasons for the amalgamation or transfer and the choice of partner. Although this is not a statutory statement and not subject to FSA approval, the FSA will take the statement into account whenconsidering whether to confirm the amalgamation or transfer. A friendly society will therefore find it helpful to consult the FSA about the content of such a statement.

The FSA has discretion under section 86(3)(b) of the Friendly Societies Act 1992 to allow a transferee society to resolve to undertake to fulfil the engagements of a transferor society by resolution of the committee of management, rather than by special resolution. Among the issues on which the FSA will wish to satisfy itself before exercising this discretion, are that the transfer will be in the interests of the members of both societies and that the transfer will not mean a change of policy by the transferee society. The FSA is unlikely to exercise this discretion unless the transferee is significantly larger than the business to be transferred.

The FSA has discretion under section 89 of the Friendly Societies Act 1992 to modify some of the requirements for a transfer of engagements from a friendly society, on the application of a specified number of its members, if it is satisfied that it is expedient to do so in the interests of its members or potential members.

Schedule 15 to the Friendly Societies Act 1992 requires a statement to be sent to every member of a friendly society entitled to vote on a transfer or amalgamation. Among other matters this statement has to cover the financial position of the friendly society and every other participant in the transfer or amalgamation. The members should be provided with sufficient financial information about the respective financial positions of the participants to gain an understanding of the relative financial strengths and key features of the participants. The statement has to include a summary of any actuary's report under section 88, though the FSA may direct that the summary is to be provided separately if inclusion appears impractical.

The financial information provided under SUP 18.4.13 G would normally contain comparative statements of balance sheets at the same date, and include main investments, reserves and funds or technical provisions, with details of the number of members of each participant as at the balance sheet date and the premium income of the relevant fund of each participant during the financial year to which the balance sheet relates. SUP 18.4.15 G to SUP 18.4.18 G give further guidance on the financial information to be included.

If the information relates to a position some time in the past, the information should state that there has been no significant change or include a clear description of the changes. Differences in accounting policies and reporting requirements could lead to the loss of some comparability between participants. Such differences and their estimated financial effects (if any) should be explained.

The information should state whether any of the participants has any significant future capital commitments. The FSA will require it to state that the transfer of engagements or amalgamation will not conflict with any contractual commitment by a society, any subsidiary or any body jointly controlled by it and others.

Brief details should be given of the date of the last actuarial valuation and the position revealed (surplus/deficit, required minimum margin and free assets) for each participant.

The FSA may require confirmation from the auditors of either friendly society involved in the transfer or amalgamation about the reasonableness of any part of the information in the statement. For instance such confirmation would normally be required if the financial information relates to a date more than six months previously.

The statement is required to include particulars of:

1. (1)

   any interest of the members of the committee of management in the amalgamation or transfer; and

2. (2)

   any compensation or other consideration proposed to be paid to committee members or other officers of the society and to the officers of every other society or person participating in the amalgamation or transfer.

Under section 92 of the Friendly Societies Act 1992, any compensation must be approved by a special resolution, separate from any resolution approving other terms of the amalgamation or transfer. This enables members to vote on this as a separate issue.

Under schedule 15 to the Friendly Societies Act 1992, the FSA may require the statement to include any other matter. The FSA would normally require inclusion of the terms on which the amalgamation or the transfer of engagements is to be made.

The statement should be clearly separate from other information sent to members. It has to be approved by the FSA and if it is not in a self-contained document, the approved element should appear in a separate section.

SUP 18 Annex 1 provides an example of the information for members required by Schedule 15.

Under the Friendly Societies Act 1992:

1. (1)

   when the members of a transferor society have approved the transfer of its engagements by passing a special resolution and the transferee has approved the transfer (by passing a resolution where the transferee is a friendly society); or

2. (2)

   when two or more societies have approved a proposed amalgamation by passing a special resolution;

it, or they jointly, must then obtain confirmation by the FSA of the transfer. Notice of the application will need to be published in one or more of the London, Edinburgh or Belfast Gazettes and other newspapers as directed by the FSA. If the FSA confirms a transfer, then itwill register the society's instrument of transfer after receiving an application on the appropriate form by the transferor society and the transferee. If the FSA confirms an amalgamation, it will register the successor society. All the property, rights and liabilities pass on the transfer date specified by the FSA.

For a directive friendly society, if the transfer or amalgamation includes policies where the state of the risk or the state of the commitment is an EEA State other than the United Kingdom, consultation with the Host State regulator is required and SUP 18.2.25 G to SUP 18.2.29 G apply (for an amalgamation they apply as if the business of the amalgamating societies is to be transferred to the successor society). Paragraph 6(1) of Schedule 15 to the Friendly Societies Act 1992 requires publication of the application to the FSA for confirmation of an amalgamation or transfer and the FSA may require the notice of the application to be published in two national newspapers in the Host State.

The criteria that the FSA must use in determining whether to confirm a proposed amalgamation or transfer are set out in schedule 15 to the Friendly Societies Act 1992. These criteria include that:

1. (1)

   confirmation must not be given if the FSA considers that:

   1. (a)

      there is a substantial risk that the successor society or transferee will be unable lawfully to carry out the engagements to be transferred to it;

   2. (b)

      information material to the members' decision about the amalgamation or transfer was not made available to all the members eligible to vote;

   3. (c)

      the vote on any resolution approving the amalgamation or transfer does not represent the views of the members eligible to vote; or

   4. (d)

      some relevant requirement of the Friendly Societies Act 1992 or the rules of any of the participating societies was not fulfilled (but it can modify some requirements and direct that certain failures may be disregarded, see SUP 18.4.12 G and SUP 18.4.27 G);

2. (2)

   the FSA must be satisfied that:

   1. (a)

      the transferee or successor society will have any permissions necessary under Part IVof the Act;

   2. (b)

      for a transfer, it is in the interests of the members of each friendly society participating in it (see SUP 18.4.6 G); and

   3. (c)

      for a directive friendly society where a transfer includes policies where the state of the risk or the state of the commitment is an EEA State other than the United Kingdom, the Host State regulator has been notified of the transfer and has consented or has not refused consent to the transfer; and

3. (3)

   for a transfer, the transferee possesses the required minimum margin after taking the proposed transfer into account or, where it is not required to maintain a required minimum margin, possesses an excess of assets over liabilities (for a transferee that is a Swiss general insurance company or an EEA firm, this is evidenced by a certificate from its home state regulator).

If authorisation or a Part IV permission is needed, the FSA will need to consider the application for authorisation or permission in the usual way. If the authorisation or permission is refused, confirmation cannot be given even if all the other criteria are met. As part of the regulatory objective to protect consumers, the FSA may consider whether an amalgamation is in the interests of members.

The FSA may (as an alternative to refusing confirmation) direct the society or societies to remedy certain procedural defects in a proposed transfer or amalgamation, and after they have been remedied confirm the application. If it appears to the FSA that failure to meet a "relevant requirement" of the Friendly Societies Act 1992 or the rules of the friendly society could not be material to the members' decision, then it may direct that this failure is to be disregarded.

Any interested party has the right to make representations to the FSA about an application for confirmation of a transfer or amalgamation. This includes any person (whether a member of the friendly society or not) who claims that he would be adversely affected by the amalgamation or transfer. The person making the representations should state clearly why he or she claims to be an interested party and the ground or grounds to which the representations are directed.

Written representations, or written notice of a person's intention to make oral representations, or both, are required to reach the FSA by the date published in the relevant Gazettes and other newspapers. Those giving notice of intent to make oral representations are advised to state the nature and general grounds of the oral representations they intend to make. Persons who make written representations but subsequently decide also to make oral representations are required, nevertheless, to give notice of that intention, in writing, to the FSA by the same date.

The FSA will send copies of all written representations to the society(ies), and will afford them an opportunity to comment on the representations. It may consider the written representations and a society's response to them, before the date set for hearing oral representations. A synopsis of the written representations (probably in the form of a summary of each of the points made and the numbers of persons making each point) and a society's responses will be made available to those participating in the hearing. This is intended to inform those making oral representations of the points already being considered by the FSA.

The FSA expects that any documents referred to in a society's comments will be made available by the society for inspection at its registered office and, if reasonably possible, at the venue of the hearing on the date of the hearing. However if a society applies to put documents which it considers to be sensitive to the FSA in confidence, the FSA will balance any disadvantage this might cause interested parties in making representations against the commercial damage that publication of the documents might cause, and may permit the documents or sensitive parts of them not to be available for inspection.

Interested parties may be represented and may make collective representations. Such arrangements should be notified to the FSA in advance to enable it to make appropriate arrangements.

The hearing referred to in SUP 18.4.30 G will be at a time and place that will be notified to the participants and will be conducted by FSA representatives. The hearing may last longer than one day and may be adjourned. The FSA will try to tell participants when they may expect to make their representations and when the society may be expected to respond.

The FSA expects that oral hearings will be held in public though this is not required. At the start members of the general public and the press will be asked to wait outside while participants are asked if any of them has good reason to object to the admission of the general public or the press. Unless an objection by a participant is upheld by the FSA representatives, the press and the general public will then be admitted, within the limits of the space available. However, the FSA representatives may decide that parts of the hearing will be in private if that appears to them to be desirable.

The procedure will be informal. All participants will be expected to speak concisely and avoid repetition. The FSA will, as far as practicable, help those who are not professionally represented. Those taking the hearing may question the participants. The sequence of events will normally be broadly:

1. (1)

   any preliminary matters (such as the admission of the public or other procedural questions) will be dealt with;

2. (2)

   the chair of the hearing will introduce the proceedings;

3. (3)

   the society representatives will be invited to speak on the application, including a description of the events at the meeting at which the resolution to amalgamate or transfer was put to the members, a statement of the voting on the resolution, and any other matters which they wish to introduce at that stage;

4. (4)

   the other participants will be invited to speak to their representations. The FSA expects to call them in order of a list arranged, so far as possible, by subject matter;

5. (5)

   the society representatives will be invited to reply to, or comment on, the points made by the other participants; and

6. (6)

   the other participants will be invited to comment on the society replies.

The above procedure may be varied according to the circumstances at the hearing, and is intended only as a guide. The hearing may be adjourned if the FSA representatives consider that necessary to enable facts to be checked or additional information to be obtained.

The FSA will not decide whether to confirm the transfer or amalgamation at the hearing. A copy of its written decision, including its findings on the points made in representations, will be sent to the society(ies) and to those making representations. It will also be available to any other person on request and may be published.