The judgment clarifies the Court’s approach to proposed transfers under Part VII of FSMA, as well as the scope and application of s. 110(1)(b). 

On 24 November 2021, the High Court of England and Wales (the Court) sanctioned a £10.1 billion annuity book transfer from The Prudential Assurance Company Limited (PAC) to Rothesay Life Plc (Rothesay) under Part VII of the Financial Services and Markets Act 2000 (FSMA).

The Court previously declined to sanction the transfer following an initial sanction hearing in July 2019. The Court of Appeal then overturned that decision in December 2020 after an appeal by PAC and Rothesay, and the transfer was remitted to the Court for a further sanction hearing between 8-10 November 2021 before the honourable Mr Justice Trower (the Remitted Sanction Hearing). The Court’s judgment following the Remitted Sanction Hearing was handed down on 24 November 2021 (the Judgment), and provides useful guidance on certain aspects of the Part VII process.

The Court’s Approach in Deciding Whether to Sanction a Scheme

The Judgment provides a clear statement of the approach that the Court should take in deciding whether or not to exercise its discretion under s. 111(3) of FSMA to sanction a proposed transfer following the principles set out in the Court of Appeal’s decision.

First, the Court’s paramount concern on a transfer of an annuity business such as this will be to assess whether the transfer will have any material adverse effect on: (a) the receipt by the annuitants of their annuities, or on the payments that are or may become due to the other annuitants, policyholders, or creditors of the transferor or transferee; or (b) the standards of service provided to the transferring annuitants. The Court may need to consider other factors depending on the circumstances of a case, but no other factors were relevant to this case.

An adverse effect will only be material to the Court’s consideration if it is: (a) a possibility that cannot sensibly be ignored having regard to the nature and gravity of the feared harm in the particular case; (b) a consequence of the scheme; and (c) material in the sense that there is a prospect of real, as opposed to fanciful or insignificant, risk to the position of the stakeholder concerned.

Second, in approaching this question, the Court’s first duty is to carefully scrutinise the reports of the independent expert and the regulators, as well as the evidence of any person required to be heard under s. 110 of FSMA. In the absence of any errors, omissions, or inadequate or defective reasoning, the Court will accord full weight to the opinions of the independent expert and the regulators in exercising its discretion, and will not depart from their conclusions without significant and appropriate reason for doing so.

Third, there are certain matters that the Court ought not take into account in exercising its discretion. The Court of Appeal stressed that such matters included: (a) subjective factors, such as the age, venerability, or established reputation of an insurer that may form the basis on which annuitants chose one insurer over another when taking out their policy; and (b) speculation regarding non-contractual external financial support that was potentially available to the transferor or transferee.

The Judgment considers at length the independent expert’s reports and his conclusion that the scheme would have no material adverse impact on the security of benefits under the transferring policies, the reasonable benefit expectations of transferring policyholders, or the standards of service, governance, and management applicable to transferring policyholders. The Judgment then considers policyholders’ objections to the scheme, as well as the PRA and FCA’s non-objections.

One particular ground for objection occupied a significant amount of the Court’s time at the Remitted Sanction Hearing, and the Judgment considers it carefully. Certain policyholders, who appeared to have been influenced by Dr Dean Buckner and Professor Kevin Dowd (see section 2), raised objections to the scheme that related to the differences in the use of the “matching adjustment”[i] by PAC and Rothesay as a technique for determining an insurer’s regulatory capital position. The UK Solvency II regime specifically permits matching adjustment, and its use requires the PRA’s permission, which must be given if the conditions for its use are satisfied.[ii] Matching adjustment is therefore an integral part of the current statutory regime, although the PRA is undertaking an exercise currently to gather evidence that will inform its proposed review of the existing Solvency II regime as it applies in the UK post-Brexit. The Court’s attention was drawn to various speeches and texts issued by senior staff at the PRA with respect to the matching adjustment in an effort to support the submissions made to the Court. Notwithstanding the PRA’s ongoing work with respect to the Solvency II regime, Trower J agreed with the submissions made by Rothesay, PAC, and the PRA that the Court must apply the regulatory regime as currently drafted, following Zacaroli J’s approach to the argument on matching adjustment in Equitable Life.[iii]

Having considered the evidence and submissions in the round, Trower J found no reason to depart from the conclusions of the independent expert or the non-objection of the Regulators, and was therefore satisfied that, in all the circumstances, the scheme should be sanctioned.

Standing Under Section 110 of FSMA

In advance of the Remitted Sanction Hearing, the Court received submissions from a former employee of the PRA (Dr Dean Buckner) and an academic (Professor Kevin Dowd) seeking permission to appear at the Sanction Hearing. Neither of these individuals was a policyholder of PAC or Rothesay, or had any other nexus with the companies; rather, they are activists pursuing a public campaign against the use of the matching adjustment as a technique for determining an insurer’s regulatory financial position. Their desire to be heard at the Remitted Sanction Hearing appeared to be in furtherance of that wider campaign.

Despite their lack of a nexus to PAC or Rothesay, Dr Buckner and Professor Dowd argued that they had a right to be heard at the Sanction Hearing under s. 110(1)(b) of FSMA. Section 110(1)(b) of FSMA provides that, on an application under Part VII of FSMA relating to an insurance business transfer, “any person (including an employee of the transferor concerned or the transferee) who alleges that he would be adversely affected by the carrying out of the scheme” is entitled to be heard by the Court.

Buckner and Dowd submitted that they were adversely affected on the basis that the scheme increased the likelihood that there would be a call on the Financial Services Compensation Scheme (FSCS). They averred that the call could result in additional levies on insurance companies to meet the cost of such a demand, which may be passed to consumers of insurance products by way of an increase in future insurance premia. Buckner and Dowd also said that, in their capacity as taxpayers, they would lose out financially in case of a taxpayer-funded bailout of the FSCS.

The Court agreed with Rothesay and PAC’s submissions that s. 110(1)(b) of FSMA was not sufficiently wide as to entitle a person to be heard on the basis of this highly speculative argument regarding possible future calls on the FSCS.

Trower J (obiter) explained that the right to be heard under this section applies to policyholders, employees, and others with a relevant relationship with the transferor or transferee who allege that they will be adversely affected by the scheme.[iv] The language of s. 110(1)(b) addresses causation — the alleged adverse effect must be caused “by the carrying out of the scheme”. However, providing that the appropriate relationship and causation between the alleged adverse impact and the scheme can be established, Trower J expressed that the person should have the right to be heard under s. 110 even if the allegation is not objectively reasonable. This is consistent with the FCA’s view expressed at the Remitted Sanction Hearing that the legislature did not intend any form of merits-based filter for those who wish to appear.

Buckner and Dowd lacked the required relationship with PAC or Rothesay to establish standing under s. 110(1)(b). However, in any event, Trower J commented that their argument failed to satisfy the requirement that the alleged adverse effect is caused by carrying out the scheme. There was no basis to conclude that the scheme would increase any risk of Rothesay becoming insolvent, and the indirectly related circumstances that Buckner and Dowd relied on were, in any event, too remote from the carrying out of the scheme.

Notwithstanding their apparent lack of standing under s. 110(1)(b), Trower J exercised the Court’s discretion to permit Buckner to address the Court at the Remitted Sanction Hearing. The reasons for this decision were twofold. First, Buckner’s views had been adopted by more than one objecting policyholder, so hearing his reasoning first-hand was preferable. Second, to ensure that policyholders’ concerns about the issues Buckner raised were assuaged, by giving him the opportunity to summarise his position and answer any questions from the Court.

Ongoing PRA Consultation on Statement of Policy

Separate from this case, in July 2021 the PRA published a consultation paper setting out certain proposed changes to its Statement of Policy regarding its approach to insurance business transfers under Part VII of FSMA.[v] The consultation includes various proposals that touch on considerations that were relevant to this case.

In July 2021 the PRA published consultation paper CP16/21, which proposed certain changes to its Statement of Policy regarding its approach to insurance business transfers under Part VII of FSMA.[vi] The transfer in question, given its history and complexity, has raised a number of issues that are  reflected in the consultation paper.

The role of the independent expert and their conclusions, as well as the role of the regulators, came under scrutiny during the proceedings. Changes have been made in regards to the role of both independent experts and regulators, including the PRA setting out in detail the specific role that it plays in assessing a scheme to clarify what its remit is. In particular, the PRA’s role is to assess the scheme against its statutory objectives rather than to conduct an assessment of its terms in tandem with the independent expert.

Similarly, PRA’s expectations of independent experts and their reports has been expressed in more detail, with greater emphasis on a number of factors. For example, independent experts are expected to have an enduring role that continues until the scheme becomes effective, therefore they need to monitor their independence on an ongoing basis. This was particularly relevant to the present case given that policyholders raised questions about the ongoing role of the independent expert throughout the appeal process and further sanctions hearing.

The PRA has also incorporated its expectations that independent experts include additional analysis on the effect of the scheme at firm and policyholder level, including the potentially available management actions that have been considered and the likelihood and potential effects of the insolvency of the parties. Both of matters were scrutinised at first instance, and were therefore considered at the appeal stage of this case.

The PRA, in approving the form of an independent expert’s report, also expressly requires the expert to “take into account all the issues that appear to the PRA to be relevant” and to incorporate appropriate reasoning. In the present case, policyholders raised a wide range of issues that were unconnected with Solvency II metrics and the independent expert was required to assess them as part of the process. This approach is expansive — which is evident in the detailed assessments required in this case — including on matters that are legal or regulatory rather than actuarial. Notably, there is now specific reference to the emergence of risks after the first year that are not fully captured by the regulatory requirements, which may have been prompted by concerns raised at different stages of this transfer in light of the long term nature of the annuity book in question.

The PRA has also expressly set out its expectation that, in circumstances in which there has been a long duration between the directions hearing and the final court hearing, it may be appropriate for the independent expert to produce an updated scheme report rather than a supplementary report. This development might well have been triggered by the PRA’s experience of the current transfer, in which, given the substantial delay, the Court of Appeal and the applicants acknowledged that the factual and financial information before the Court required substantively updating prior to sanction.

The Court’s decision to sanction the scheme in this case allows PAC and Rothesay to bring into effect a transfer that the parties first agreed more than three years prior. The Judgment provides useful guidance on the Court’s approach when considering proposed transfers under Part VII in light of the Court of Appeal’s decision, as well as the scope and application of s. 110(1)(b) of FSMA. The PRA’s ongoing consultation on its Statement of Policy hopefully will provide further clarity on the regulation of Part VII processes in future.

Latham & Watkins advised Rothesay on the transaction and the Remitted Sanction Hearing. Latham’s team was led by London Insurance M&A partner Victoria Sander, with support from associates Christopher Ramsey and Warren Wellington.

[i] Broadly, the matching adjustment is an actuarial technique that allows an insurer to value its long-term insurance liabilities by using a discount rate that is higher than the risk-free rate, if those liabilities are matched by assets held as part of an investment strategy to hold until maturity.

[ii] Regulation 42 of The Solvency 2 Regulations 2015 (2015/575).

[iii] The Equitable Life Assurance Society [2019] EWHC 3336 (Ch)

[iv] Paras 66 to 71.

[v] Ref:

[vi] Ref:

[i] Broadly, the matching adjustment is an actuarial technique that allows an insurer to value its long-term insurance liabilities by using a discount rate that is higher than the risk-free rate, if those liabilities are matched by assets held as part of an investment strategy to hold until maturity.

[ii] Regulation 42 of The Solvency 2 Regulations 2015 (2015/575).

[iii] The Equitable Life Assurance Society [2019] EWHC 3336 (Ch).

[iv] Paras 66 to 71.

[v] Ref:

[vi] Ref: