PS12/23 – Dealing with insurers in financial difficulties

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to consultation paper (CP) 3/23 – Dealing with insurers in financial difficulties. It also contains the PRA’s final policy, as follows:

• amendments to the Policyholder Protection Part of the PRA Rulebook (PPP) (Appendix 1)
• updated Policyholder protection statement of policy (April 2015) (FSCS SoP) (Appendix 2)
• new Insurers in Financial Difficulties: Notification of Affected Persons Part of the PRA Rulebook (PRA rules) (Appendix 3)
• new Dealing with insurers in financial difficulties statement of policy (PRA SoP) (Appendix 4)

1.2 The PRA received three responses to this consultation.

1.3 This PS applies to all PRA-authorised insurers (other than friendly societies) with a Part 4A permission, regardless of their size or location. It is also relevant to the Financial Services Compensation Scheme (FSCS), policyholders, and counterparties of PRA-authorised insurers, including secured creditors. The proposals do not directly apply to the society incorporated by the Lloyds Act 1871 by the name of Lloyd’s (the Society) and affected market participants,^{footnote [1]} but the PS is relevant to them. The proposals do not apply to EEA insurers in contractual run-off in the UK, as these do not have a Part 4A permission.

Background

1.4 Legislative amendments to the Financial Services and Markets Act 2000 (FSMA) dealing with insurers in financial difficulties are contained in the Financial Services and Markets Act 2023. These require the PRA to take steps to implement the new regime for insurers in financial difficulties. CP3/23 set out how the PRA proposed to do this by introducing:

• new PPP Rules concerning how the FSCS should operate in connection with a write-down and consequential amendments to the FSCS SoP
• new PRA rules concerning the notification of affected persons
• a new PRA SoP setting out the PRA’s approach and expectations in relation to write-down applications and the appointment of write-down managers

Summary of responses

1.5 The PRA received three responses to the CP. Respondents welcomed the proposals but made three suggested amendments to the proposed rules, which are set out in Chapter 2.

Changes to draft policy

1.6 Where the final rules differ from the draft in the CP in a way that is, in the opinion of the PRA, significant, FSMA^{footnote [2]} requires the PRA to publish:

• details of the difference together with a cost benefit analysis
• a statement setting out, in the PRA’s opinion, whether or not the impact of the final rule on mutuals is significantly different to the impact that the draft rule would have had on mutuals, or the impact that the final rule will have on other PRA-authorised firms

1.7 The PRA has made minor changes to the rules, as consulted on to reflect the responses to the CP. As a result, the rules have been amended to remove the reference to the Society and managing agents from the definition of ‘insurer under write-down’. A definition of ‘affected market participant’ has been added to PPP and Chapter 1 PPP now excludes the Society and affected market participants from the scope of the new rules.

1.8 The PRA does not consider that this change is significant as it does not impact the policy intent. It merely clarifies a definition.

1.9 When making rules, the PRA is required to comply with several legal obligations, including considering responses to consultation and publishing an explanation of the PRA’s reasons for believing that making the proposed rules is compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [3]} In CP3/23, the PRA set out this explanation in Chapter 2 under the ‘PRA objectives analysis’ and ‘have regards analysis’ headings. The responses to the consultation supported the proposals; therefore, the analysis as presented in the CP remains unchanged.

Implementation

1.10 The amendments to PPP, the new PRA rules, the FSCS SoP, and PRA SoP will take effect on 19 September 2023.

1.11 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [4]}

2: Feedback to responses

2.1 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [5]}

2.2 The PRA has considered the responses received to the CP. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

Overview

2.3 The PRA stated that the CP is not applicable to the Society of Lloyd’s or friendly societies with Part 4A permission. Furthermore, for certainty, in the draft amendments to PPP, the PRA set out that the definition of an insurer under write-down would explicitly exclude the Society. One respondent, while not disagreeing with this approach, queried whether the PRA’s references to the terms Society of Lloyd’s in the CP and Society in the draft amendments to PPP were technically correct. This is because the respondent understood the term Society of Lloyds to refer to the Corporation of Lloyd’s, which as it is not an insurer could not in any event be within the scope of the CP. In addition, the respondent considered that the term ‘Society of Lloyd’s’ does not include the underwriting members (who actually carry out the underwriting activities) individually or as a syndicate. For the same reason, the respondent also queried whether the reference to the Society and managing agents as being out of scope of the definition of insurer under write-down^{footnote [6]} was correctly articulated.

2.4 In order to address the respondent’s concerns, the PRA has:

• expressly carved out the Society and affected market participants (a defined term used to cover members, brokers, and other participants in the Lloyd’s market under the Insurers (Reorganisation and Winding Up) (Lloyd’s) Regulations 2005) from the scope of the PPP amendments and PRA rules; and
• amended the definition of ‘insurer under write-down’ to explicitly remove the reference to the Society or managing agents.

This amounts to a technical drafting change to the way in which the Society and affected market participants are excluded, rather than a change in the policy concerning their treatment.

2.5 The same respondent also stated that the consultation did not take account of a certain overseas entity that has a branch authorised in the UK. The respondent asked to exclude the entity from the proposals on the basis that all business written by it is reinsured by Lloyd’s syndicates; therefore, if Lloyd’s is excluded from the proposals, it naturally follows that the overseas entity should also be excluded.

2.6 The definition of an in scope insurer, in the new s.377A provision, is set by the Financial Services and Markets Acts 2000 (Insolvency) (Definition of Insurer) Order 2001 (SI 2001/2634) and the PRA does not have the vires to amend that SI. According to that definition, the Society is out of scope – a point that was made clear throughout HM Treasury's consultation process. The new rules merely reflect that position. It would therefore be a departure to additionally exclude the overseas entity from the PRA rules, when technically that entity is in scope of the s.377A power itself. Furthermore, the PRA considers that the legal scope of the PRA rules should be aligned with the legal scope of the s.377A power, meaning that the overseas entity should not be specifically excluded. In any case, the PRA does not usually mention a specific firm in its rules (the exclusion of the Society is different since the PRA is excluding the entire market) – firm-specific changes to the rules are catered for through the PRA’s rule waiver process.

Policyholder protection rules and FSCS statement of policy

2.7 The PRA proposed that the FSCS would have a right of recovery in respect of top-up payments made to policyholders. A respondent suggested that the PRA should consider establishing and maintaining a public register of insurers against which the FSCS has a recovery right under a write-down order.

2.8 The FSCS already maintains a register of firms that have failed or are subject to investigation and the PRA considers it would be more appropriate for the FSCS to maintain information on firms subject to a write-down order. The PRA has raised this issue with the FSCS and the FSCS has confirmed that this information will be made available on its website in an appropriate format.