Scottish Equitable Plc, Re

In sanctioning an insurance business transfer scheme, the court must decide whether it is appropriate to sanction the scheme under Financial Services and Markets Act 2000, section 111(3). The court recognises the commercial judgment of the directors, while considering whether policyholders or other affected groups will be adversely affected and whether the scheme as a whole is fair between their interests. Policyholders have no veto. The court need not select the best available scheme or improve its individual provisions. The assessment is objective and gives close attention to the independent expert’s report and the regulators’ views. In a transfer of general insurance business, the central concern is usually whether the transferee can meet its obligations, rather than subjective fairness. Prior reinsurance does not prevent a subsequent transfer from being a transfer of business.

Scottish Equitable Plc and Rothesay Life Plc applied under Part 8 for sanction of a business transfer scheme under Financial Services and Markets Act 2000, section 111, with ancillary orders under section 112. The scheme transferred approximately 187,000 annuity policies from Scottish Equitable to Rothesay. The economic risk had previously been transferred through reinsurance, but Scottish Equitable remained contractually liable to the policyholders until the scheme took effect.

The Prudential Regulation Authority and the Financial Conduct Authority raised no objection. The independent expert concluded that the scheme would not materially adversely affect benefit security, reasonable expectations, service standards or governance, and that it was equitable to all affected classes. Several policyholders objected, principally on the grounds that the transfer was not a business transfer, that the scheme interfered with property rights, that policyholders had not been consulted before the reinsurance, and that they should have been given a choice of provider. The issues were whether the court had jurisdiction and whether the scheme should be sanctioned.

The scheme was sanctioned and an order was made accordingly.

1. Jurisdiction. The transfer of a reinsured book of annuity policies remained a transfer of insurance business for the purposes of Financial Services and Markets Act 2000, sections 105 and 111. The concept of business is wide and flexible. Section 105(1) does not require the transferred business to expose the transferor to the original insurance risks. Scottish Equitable remained primarily liable to policyholders, retained the credit risk on Rothesay, and continued to administer and pay most policies. Those matters independently supported the conclusion that the scheme concerned a business. The reinsurance was not itself a transfer of business or a breach of section 104.
2. Human rights and notice. The challenge under the Human Rights Act 1998 and Article 1 of the First Protocol failed. A scheme which is fair in the objective sense required by the authorities does not infringe policyholders’ property rights merely because contractual obligations are transferred. The notice given was also adequate. The supplementary expert report did not raise significant new matters and did not justify an adjournment.
3. Statutory discretion. The word used by section 111(3) is “appropriate”, not subjective fairness. The court must give due recognition to the directors’ commercial judgment. It should compare policyholders’ contractual rights and reasonable expectations before and after the scheme, consider adverse effects on affected persons, and decide whether the scheme as a whole is fair between the relevant interests. Individual adverse effects do not require refusal. The court is not required to devise the best scheme or amend details which could be improved.
4. Evidence and objections. The independent expert’s report was central and ordinarily decisive, though it did not replace the court’s discretion. The court gave substantial weight to the expert’s conclusion and the regulators’ absence of objection. Subjective preferences for the transferor, objections to its shareholders, or a desire to choose another provider did not establish material detriment or unfairness. The scheme did not have to leave every policyholder in every respect at least as well off as without it.
5. For this annuity transfer, the principal concern was the financial ability of Rothesay to meet its obligations. The expert’s conclusion that there was no material adverse effect, together with the regulators’ views, justified sanction.