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If negotiations result in a hard Brexit, UK insurers may not be permitted to use EU Passporting to conduct cross-border business on European Economic Area risks and vice versa. To address this many are preparing to transfer European risk to their EU-domiciled affiliates or subsidiaries via a strict legal process known as a Part 7 transfer which may itself also be subject to change following Brexit. But there are a number of conduct areas you must keep an eye on to make sure your application is met with approval.
What is a Part 7 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.
What do firms need to do when preparing for a Part 7 transfer?
On deciding to make a part 7 transfer, you will spend the first three to five months in close consultation with the PRA and FCA. There are a number of areas you’ll need to look at:
- Insurance policies – you’ll need to decide which insurance policies you intend to move to an EEA carrier
- Transfer documents – the PRA and FCA will often have direct input into the drafts, and will need to be satisfied that the transfer will not be detrimental to policyholders’ rights and security overall
- Expert opinion – you need to instruct an independent expert, approved by the PRA, who will then draw up an opinion comparing the likely effects on policyholders (including any existing policyholders of the EEA carrier) with and without the transfer
- Filing documents – the transfer documents and report will be finalised and filed with the court
The court will give directions for next steps in the transfer process. Apart from some rare exceptions, you’ll be required to notify all policyholders – whether their policies are being transferred or not – and other parties affected by the scheme.
You must also advertise the transfer in national newspapers. This is a fundamental protection for policyholders within the Part 7 process.
Key part 7 transfer considerations for insurance firms
As well as the legal considerations around transfers, there are some key conduct challenges involved in performing a Part VII transfer.
The regulators’ attention will primarily focus on:
- whether policyholders are adversely impacted by the transfer
- whether each policyholder has adequate information on the transfer and its impact
- whether each policyholder has reasonable time in which to determine whether or not they are adversely affected.
- whether policyholders are told how to object if they believe they are adversely affected.
To help mitigate any other potential risks, you should consider performing an impact assessment with a focus on policyholder 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.
Keep an eye on the following to make sure they meet conduct requirements when performing a Part VII transfer:
- Service level – continuity of an appropriate level of service after the transfer.
- Fairness – products and the T&Cs must not be made significantly less fair for policyholders under the transfer.
- Information transfer – in a complaint or claim situation, transferal of information must be effective to deliver consistency for policyholders. The impacts of GDPR will also need to be considered.
- Resources – make sure you have sufficient resources and knowledge to ensure policyholders are treated fairly following the transfer. Retaining evidence that this has been assessed will increase the likelihood of approval for the transfer.
How Bovill can help
Your firm’s conduct in regard to Part VII transfers should be viewed as an essential part of the process.
Bovill has deep experience in both conduct risk and the insurance sector. We can help you identify and understand any adverse impacts you’re your policyholders are likely to face.
Where you can evidence that you are taking a proactive approach to the fair treatment of policyholders involved in the Part 7 transfer, you are more likely to get approval from the regulator, which will work in your favour when it comes to the court ruling on whether or not you go ahead with the process.
