Scottish Widows Ltd, Re

When sanctioning an insurance business transfer scheme under Financial Services and Markets Act 2000, the court must decide whether the scheme is fair as a whole between affected classes. It should compare policyholders’ contractual rights and reasonable expectations before and after the transfer, giving close attention to the independent expert’s report and the regulators’ views. The court recognises the directors’ commercial judgment and need not devise the best possible scheme. In exceptional circumstances, including Brexit-related uncertainty, the risk of harm if no transfer occurs may be balanced against disadvantages caused by the scheme. Individual adverse effects do not require refusal where the scheme remains fair overall. The statutory requirements being satisfied, the court sanctioned the transfer and approved an amendment to an earlier scheme.

Scottish Widows Limited sought orders under Part VII of the Financial Services and Markets Act 2000 to transfer certain insurance business concerning policyholders resident in Germany, Austria, Italy and Belgium to its Luxembourg subsidiary, Scottish Widows Europe SA. The transfer was intended to preserve lawful contract servicing after a possible no-deal Brexit and included reinsurance, indemnity and security arrangements.

The application also sought amendment of a 2015 Part VII scheme. The court considered objections concerning security of benefits, loss of Financial Services Compensation Scheme protection, taxation, regulation, dispute resolution and the fairness of the associated arrangements.

1. Sanction. The court sanctioned the Scheme and made the ancillary orders necessary to give it effect under sections 111 and 112 of the Financial Services and Markets Act 2000.
2. Applicable approach. The court’s discretion is real and must be exercised by considering whether the scheme is fair as between affected classes. The court compares policyholders’ contractual rights and reasonable expectations before and after the scheme, giving close attention to the independent expert’s report and the PRA and FCA’s views. It recognises the directors’ commercial judgment and does not substitute its own preferred scheme where the proposed scheme is fair.
3. Brexit context. The continuing uncertainty over passporting rights and the risk that policies could not lawfully be serviced after a no-deal Brexit were legitimate matters for the directors to address. The risk of prejudice if nothing were done had to be balanced against potential disadvantages under the transfer. The possibility that some policyholders might be adversely affected did not require rejection where the scheme was fair overall.
4. Objections. The court accepted that the transfer would not materially prejudice security of benefits, policy performance, administration or regulation. The loss of FSCS protection was outweighed by the benefit of certainty of continued service, given SWE’s capitalisation and the remote risk of insolvency. The choice of Luxembourg and the replacement of access to the FOS with Luxembourg complaints mechanisms were not materially unfair.
5. Anti-deprivation issue. The court noted, but did not decide, whether SWE’s ability to retain the funds withheld on SWL’s insolvency engaged the anti-deprivation principle discussed in Belmont Park v BNY Corporate Trustee Services [2012] 1 BCLC 163 (SC). The issue did not affect the decision because the risk was remote and the arrangements had a credible regulatory and commercial justification.
6. Amendment. The court approved the amendment to the 2015 Scheme because the contractual amendment mechanism had been followed, the regulators had been notified, and the independent actuary had certified that the amendment would not materially adversely affect policyholders.