Prudential Assurance Company Ltd and Rothesay Life Plc, Re

On an application to sanction an insurance business transfer under Part VII of the Financial Services and Markets Act 2000, the relevant considerations depend on the business and circumstances. For an in-payment annuity book, the paramount concern is any material adverse effect on policyholders’ benefits or service.

The court must scrutinise the independent expert’s and regulators’ opinions. Absent material error or defective reasoning, it must give them full weight, particularly on actuarial and financial security. A material adverse effect requires a real or significant risk which results from the scheme and cannot sensibly be ignored. Speculation about future non-contractual parental support, and policyholders’ subjective reliance on an insurer’s age or reputation, are irrelevant where regulatory solvency and continuing supervision establish equivalent financial resilience.

PAC and Rothesay sought approval under Part VII of the Financial Services and Markets Act 2000 for the transfer to Rothesay of about 370,000 in-payment annuity policies. The independent expert concluded that the scheme would cause no material adverse effect on policyholders’ benefit security or reasonable expectations. The PRA and FCA did not object.

Snowden J refused sanction. He relied principally on a perceived disparity in potential parental support and on policyholders’ reasonable reliance upon PAC’s age, reputation and expected continuing identity as their annuity provider. PAC and Rothesay appealed with permission.

The central questions were how the discretion under section 111(3) should be exercised, what weight should be given to expert and regulatory assessments, and whether potential parental support and policyholders’ subjective choices were relevant.

1. Appeal allowed and application remitted. The judge’s exercise of discretion under section 111(3) of the Financial Services and Markets Act 2000 could not stand. The renewed sanction application was remitted to another judge of the Chancery Division: paras [132]–[134].

2. The appropriate approach depends on the nature of the transferred business and the circumstances producing the scheme. There is no universal test or exhaustive list of factors. For an in-payment annuity book, the paramount concern is whether the transfer will materially adversely affect payment of benefits or service standards: paras [75]–[80].

3. The court must scrutinise the independent expert’s and regulators’ opinions and investigate any error, omission or defective reasoning. In the absence of such defects, it must give those opinions full weight. Departure requires significant and appropriate reasons, especially on actuarial and financial-security questions, because the court must not substitute its own expertise: paras [81]–[82].

4. An adverse effect is material only if it is a possibility which cannot sensibly be ignored, is caused by the scheme, and creates a real or significant rather than fanciful or insignificant risk. A scheme may nevertheless be sanctioned despite a material adverse effect, including where it rescues a business. Differential effects require an assessment of overall fairness: paras [83]–[86].

5. Solvency II metrics and continuing PRA supervision assess future resilience, not merely a one-year snapshot. The judge wrongly discounted the expert’s and PRA’s conclusions and speculated about deterioration over the annuities’ lifetime. Compliance with the regulatory regime, coupled with continuing supervision, was normally sufficient to assess future resilience: paras [90]–[110].

6. Possible non-contractual parental support was irrelevant once the Solvency II requirements were satisfied. A parent cannot be compelled to support an insurer and may sell it. Such speculation could not override the expert and regulatory assessment: paras [103]–[107].

7. The policyholders’ reliance on PAC’s age, venerability, reputation and continued identity was subjective and irrelevant to the statutory discretion. The question was whether the scheme caused a material adverse effect on benefit security. The court approved the objective approach in Re Scottish Equitable plc and Rothesay Life plc [2017] EWHC 1439 (Ch): paras [114]–[121].

8. The court found no error in the judge’s treatment of the board’s commercial judgment or commercial prejudice. Directors are assumed to comply with their duties, but their commercial judgment ordinarily has little additional role in a straightforward transfer of liabilities. Commercial prejudice would carry little weight if policyholders suffered a material adverse effect: paras [122]–[131].

1. Court of Appeal (Civil Division): The appeal was allowed. The refusal of sanction was set aside and the application was remitted to another judge of the Chancery Division: [2020] EWCA Civ 1626.
2. High Court, Chancery Division: Snowden J refused to sanction the proposed insurance business transfer on 16 August 2019. No citation for that decision is stated in the judgment.