Re Pearl Assurance (Unit Linked Pensions) Limited

The court considered an application under Part VII of the Financial Services and Markets Act 2000 to sanction a scheme transferring the long term insurance businesses of three Pearl Group subsidiaries to another group subsidiary. The statutory prerequisites (including independent expert review and Financial Services Authority certificates) were satisfied. The principal legal issue concerned a power in the Scheme (paragraph 16.4) enabling the transferee to close, amalgamate or otherwise vary unit-linked funds and to change investment objectives, potentially in a way that would vary existing policyholders' contractual rights. The judge applied the well-established discretionary test of fairness between affected persons and the requirement that the independent expert's report and FSA involvement be meaningful. The court concluded that the power in paragraph 16.4 raised a material issue of adequate disclosure to policyholders and to the FSA and, as a matter of process, should not be exercisable so as to override policy terms without further judicial oversight. The Scheme was therefore sanctioned subject to a condition that paragraph 16.4 not be exercised to contravene policy terms unless there is a further court application accompanied by a further approved expert statement, evidence of communication to policyholders and FSA approval.

This was an application under Part VII of the Financial Services and Markets Act 2000 for court sanction of a transfer scheme which would move the entire long term insurance businesses of Pearl Assurance (Unit Linked Pensions) Limited, Pearl Assurance (Unit Funds) Limited and London Life Linked Assurances Limited to NPI Limited, a fellow Pearl Group subsidiary. The applicants sought the court's approval of the transfer after obtaining the required independent expert report and FSA certificates.

Nature of the application: sanction of a business-transfer scheme under Part VII FSMA 2000.

Key issues framed by the court:

• whether jurisdictional and procedural conditions under Part VII and related regulations had been satisfied;
• whether communications to policyholders had been adequate (including a late mailing to 25 policyholders);
• whether paragraph 16.4 of the Scheme, which enabled future amalgamation, closure or modification of unit-linked funds and changes to investment objectives, would operate so as to vary policyholders' contractual rights and, if so, whether that consequence had been sufficiently drawn to the attention of policyholders and the FSA; and
• whether, overall, the Scheme was fair to affected policyholders and should be sanctioned in the exercise of the court's discretion.

Court's reasoning and findings: the judge found that all jurisdictional conditions and, save for two procedural issues, the procedural requirements had been satisfied. The first procedural lapse was late posting to 25 policyholders; the court directed that a limited waiver could address that lapse. The second, and more substantial, issue was that paragraph 16.4 could operate to effect unilateral variations of contractual rights for some policyholders whose existing policies did not already permit such changes. The independent expert's report (Mr Arnold) and the information sent to policyholders suggested that any merging or changes would be subject to policy terms and FSA rules; however it emerged that the independent expert considered the powers beneficial even if exercised beyond existing policy restrictions and that not all policyholders' contracts included the necessary contractual authorisation. Because this important consequence had not been made sufficiently clear to policyholders or, properly, to the FSA prior to the hearing, the court held that due process required fuller disclosure and further steps before the power could be exercised to override contractual terms.

Relief granted: the court sanctioned the Scheme but ordered that paragraph 16.4 must not be exercised to the extent it would be contrary to affected policyholders' terms and conditions without a further application to the court, supported by a further witness statement of the independent expert in approved form, evidence that the proposal has been communicated to and approved by the FSA, and evidence that policyholders have been sufficiently informed.

The court sanctioned the proposed Part VII transfer scheme but imposed a condition: the paragraph 16.4 power enabling closure, amalgamation or modification of linked funds and change of investment objectives must not be exercised so as to be contrary to affected policyholders' terms and conditions without a further court application. That further application must be supported by a further approved witness statement of the independent expert, evidence of communication to policyholders and evidence of FSA approval. The rationale was that the exercise of a power which may vary contractual rights must be the subject of clear prior disclosure and further scrutiny before the court permits it to be used to override existing policy terms.