In the Matter of the Prudential Assurance Company Limited v In the Matter of Rothesay Life Plc  EWCA Civ 1626
On 2 December 2020 the Court of Appeal overturned the decision of the High Court and allowed the appeal of Prudential Assurance Company Limited ("PAC") and Rothesay Life plc ("Rothesay") against Mr Justice Snowden's decision not to sanction their proposed transfer of approximately 400,000 policies pursuant to Part VII of the Financial Services and Markets Act 2000 ("FSMA").
The key rulings were as follows:
- That Mr Justice Snowden had been incorrect in finding there was a material disparity in the external support available to the two insurance companies. The court held this was not a material factor and that the judge had failed to accord sufficient weight to the Independent Expert's ("IE") Report and to the lack of objection by the regulators and continued regulation of Rothesay.
- The judge was wrong to accord weight to the evidence from policyholders that they had specifically chosen PAC due to its age, venerability and reputation or the fact that they had assumed PAC would provide the annuity over its lifetime. This was not a material factor in this case, and would not be considered so, unless it had a material adverse impact on the security of the policyholders' benefits.
- Adequate weight had been given to the commercial judgement of the Board of Directors and that in the circumstances of the case this was not a major factor in the judge's decision whether to sanction the scheme.
Why was the scheme rejected at first instance?
Mr Justice Snowden exercised his discretion under s.111(3) of FSMA to decline to sanction the scheme for two main reasons:
- He concluded that although Prudential and Rothesay had equivalent Solvency Capital Requirement metrics, Rothesay did not have the same capital management policies or the backing of a large well-resourced group which could support it over the lifetime of the annuities; and
- It was reasonable for PAC's policyholders (on the basis of its sales materials, age and reputation) to have chosen it on the basis of an assumption that it would not seek to transfer the policies to a third party provider.
The Points of Appeal
There are three central issues raised by the appeal which are discussed below.
1. Whether the judge was wrong to conclude there was a material disparity between the external support potentially available for each of PAC and Rothesay and/or if he had failed to accord adequate weight to the conclusions of the IE in respect of the risk of either party requiring external financial support in the future being remote.
2. Whether the judge failed to give adequate weight to the Regulators' lack of objection to the Scheme and to the continuing future regulation of Rothesay.
Issues 1 and 2 were dealt with together in the appeal judgment. It was held that Mr Justice Snowden had been incorrect in his conclusion that there was a material disparity between the potential need for external financial support of each of PAC and Rothesay. Mr Justice Snowden had failed to accord the correct weight to the IE opinion and the reports of the Financial Conduct Authority and the Prudential Regulation Authority (together, the "Regulators") as he mistakenly held that these opinions had been based upon a snapshot of just the current year. The IE and the Regulators had used the balance sheets as at 31 December 2018 in order to analyse the likely resilience of Rothesay to a 1-in-200 year stress event within the coming year but Mr Justice Snowden had failed to take into consideration that Rothesay would continue to be regulated under the same rules regarding solvency from year to year and therefore these conclusions were valid parameters for future security.
The Court of Appeal held that as the potential parental support that each of the companies might receive in the future was non-contractual and non-binding and therefore was not a relevant factor for the judge to take into consideration. Instead the focus should be on the evaluation of the insurer's Solvency II metrics together with its prospect of continued regulation.
The Court of Appeal held that with respect to Issues 1 and 2 the judge:
- Had erred in finding that there was a material disparity between the non-contractual external financial support between PAC and Rothesay;
- Should not have regarded the disparity as a material factor regardless;
- Failed to accord sufficient weight to the IE's conclusion that both the companies' capital management policies provided "a very high level of security for policyholders"1 and that "scenarios which could lead to the entire own funds of either company being dissipated are so extreme that any comparison of probabilities is subject to a very high degree of uncertainty"2; and
- Failed to accord sufficient weight to the Regulators' lack of objection and the continuing future regulation of Rothesay.
3. Whether the judge had accorded too much weight to the fact that the objecting policyholders had chosen PAC on the basis of its age, venerability and established reputation and reasonably assumed that PAC would provide their annuity throughout its lengthy term.
The Court of Appeal held that the court should not depart from the views of the IE or the Regulators unless there is a proper and relevant reason to do so. In respect of the security of the policyholders' benefits the question of paramount importance is whether the proposed transfer will have a material adverse effect.
The judgment had already held (under Issues 1 and 2) that the judge had been unjustified in making an adverse comparison between the financial strength of PAC and Rothesay. It was held that the subjective views of the objecting policyholders regarding the age, venerability and reputation of PAC were not relevant to be taken into account in the exercise of the court's discretion and nor was their reasonable assumption that PAC would provide their annuity throughout the lengthy term. In order for a factor to be relevant it must create a material adverse effect on the policyholders with regard to the security of their benefits.
Two further subsidiary issues discussed were:
4. Whether the judge had failed to accord adequate weight to the commercial judgement of PAC's board.
The Court of Appeal disagreed that the judge had failed to
accord adequate weight to the commercial judgement of PAC's
board. It was held that Mr Justice Snowden understood that the
discretion had to be exercised according to principles whilst
recognising the commercial judgement of the company's board as
provided for by the company's constitution.
The Court of Appeal noted that the court was entitled to assume that the directors of both the transferor and transferee companies were acting in accordance with their statutory and other duties and therefore, in most circumstances, the commercial judgement of the directors would have little (if any) further role to play. It was held that in the present case there was no real part for the directors judgement to be taken into consideration by the judge in deciding whether to sanction the scheme.
5. Whether the judge failed to accord adequate weight to the prejudice that a refusal to sanction would cause to PAC and Rothesay.
The judge's exercise of discretion was said not to stand and the appeal was allowed. The decision as to whether the scheme should be sanctioned has been remitted to the High Court to be heard by a different judge.
Clarification of the court's approach to a Part VII transfer
The judgment also provided useful clarification of how the court should approach a Part VII transfer application. Initially the court should identify the nature of the business being transferred and the underlying circumstances giving rise to the scheme. Due to the variation of the books held by different insurance companies and the evolution of these books over time, the court felt that it was undesirable to provide definitive categories of insurance business.
However, the court held that there are two important distinctions to be made. The first being between general insurance business (such as motor and household insurance) and long-term business (such as life assurance and annuities) and the second being between policies which vest a discretion in the insurer (e.g. policies with a with-profits element) and those which do not. The policies involved in this case did not include a discretionary element.
The court noted that different considerations would have to be taken into account for different types of business. For instance, when considering the transfer of a book of annuities in payment the court will be more concerned with the interests of the transferring policyholders, in comparison to the transfer of a with-profits business, where the fairness between the policyholders remaining with the transferor, the transferring policyholders and the companies themselves and their shareholders will be of greater importance.
The context was key, and this in turn meant that rulings in other cases should not be regarded as binding per se, but need to be considered in the context of the business in question and other relevant circumstances. The oft cited judgments in Re London Life Association Ltd3 and Re Axa Equity & Law Life Assurance Society plc and Axa Sun Life plc4 should not be treated as setting out a comprehensive statement of the factors that should be applied in all insurance business transfer cases. Whilst the Court of Appeal accepted that these cases contained "in many respects"5 factors likely to apply to the transfer of a with-profits business, they considered factors which would not apply to the case here.
In order to ensure the court's discretion to sanction a transfer remains unfettered and genuine and is not just a "rubber stamp", the court considered that when exercising its discretion it should still "take into account and give proper weight to the matters that ought to be considered, and ignore matters that ought not properly to be taken into account".6
With regard to the case at hand, the court noted that the policies were in payment annuities and therefore the "paramount concern of the court"7 was whether the transfer would have a material adverse on the annuitants receiving their annuities and or an effect on payments due or becoming due to other annuitants, policyholders and creditors of the transferee and transferor. The court was also concerned with any effects on the standard of service.
The initial duty of the court is to review the reports of the IE and the Regulators and the evidence of any person entitled to be heard under s.110 FSMA. The court should ask questions in order to identify any errors, omissions or instances of inadequate or defective reasoning. In the absence of defects the judgment directs that the court should accord full weight to the opinions of the IE and the Regulators although acknowledging that this does not mean the court can never depart from these recommendations however they would require appropriate and significant reasons for doing so. Notably, the court states that it is not an expert and should not "substitute its own expertise for that of the entities required and entitled by statute to proffer those opinions".8
The judgment sets out three factors which determine whether an adverse effect will be "material" to the court's consideration:
- It is a possibility that cannot sensibly be ignored having regard to the nature and gravity of the feared harm in the particular case;
- It is a consequence of the scheme; and
- It is material in the sense that there is a prospect of real and significant, as opposed to fanciful or insignificant, risk to the position of the stakeholder concerned.
Even where a scheme will have a material adverse effect on a group or groups of policyholders the court may still sanction the scheme in the exercise of its discretion; for example, this may be relevant where the scheme is in the nature of a rescue of a business. Where there are contrasting effects on the interests of different classes then the court will need to consider whether the proposed scheme on the whole is fair as between those interests.
The court should apply the same approach as to the exercise of its discretion when comparing the security of the policyholders' benefits and the standards of service and corporate governance that the policyholders' could expect to receive with and without the scheme.
Once the above evaluative exercises are completed the court will make a decision as to whether to sanction the Scheme if, under s.111(3) FSMA, it is appropriate to do so in all the circumstances of the case.
1 Paragraph 26,  EWCA Civ 1626
3 21 February 1989, unreported.
5 Paragraph 79,  EWCA Civ 1626
Originally Published by Mayer Brown, January 2021
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