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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Prudential Assurance Company Ltd and Rothesay Life Plc, Re [2020] EWCA Civ 1626 (02 December 2020) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2020/1626.html Cite as: [2020] EWCA Civ 1626, [2021] Bus LR 259, [2020] WLR(D) 677 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
INSOLVENCY AND COMPANIES LIST (ChD)
The Honourable Mr Justice Snowden
The Rolls Building London, EC4A 1NL |
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B e f o r e :
LORD JUSTICE DAVID RICHARDS
and
SIR NICHOLAS PATTEN
____________________
IN THE MATTER OF THE PRUDENTIAL ASSURANCE COMPANY LIMITED | ||
AND IN THE MATTER OF ROTHESAY LIFE PLC | ||
AND IN THE MATTER OF PART VII OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 |
____________________
Mr Tom Weitzman QC (instructed by the Legal Directorate of the Bank of England) appeared for the Prudential Regulation Authority
Mr Robert Purves (instructed by the Financial Conduct Authority) appeared for the Financial Conduct Authority
Mr Anthony de Garr Robinson QC and Mr Ben Griffiths (instructed by Herbert Smith Freehills LLP) appeared for the Association of British Insurers
Mr Barry Isaacs QC and Ms Charlotte Eborall (instructed by Pinsent Masons LLP) appeared for Mr Thomas Copsey, Dr Jay Ginn and Mrs Penelope Howell
Mr Anthony Kell, Mr David J Mitchell, and Mrs Kornelia Robertson appeared in person
Hearing dates: 27-29 October 2020
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Crown Copyright ©
Sir Geoffrey Vos, Chancellor of the High Court, giving the judgment of the court to which all members of the court contributed:
Introduction
Essential background
"Providing financial security since 1848
Successive generations have looked to Prudential to safeguard their financial security - from industrial workers and their families in Victorian Britain to over 26 million customers worldwide today. Our financial strength, heritage, prudence and focus on our customers' long-term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow." (emphasis added)
45. Mr. Dumbreck explained that under Solvency II, an insurer is required to calculate its [BEL - best estimate liability]. The expected future obligations of the insurer are projected over the lifetime of the contracts using the most up-to-date financial information and best estimate actuarial assumptions, and the BEL represents the present value of these projected cash-flows. The BEL and a risk margin (designed to be the amount another insurer would require to be paid to take over the obligations) represent the "Technical Provisions" of the insurer. The amount by which the assets of the insurer, measured in accordance with Solvency II, exceeds the liabilities of the insurer allowing for any other relevant factors, is known as the insurer's "Own Funds".
46. An insurer is required under Solvency II to hold eligible Own Funds at least equal in value to its Solvency Capital Requirement (SCR). Mr. Dumbreck indicated … that this is intended to be the amount required to ensure that the firm's assets continue to exceed its Technical Provisions over a one year time frame with a probability of 99.5%. In calculating the SCR most firms use the "Standard Formula" prescribed by Solvency II …
47. The insurer's eligible Own Funds divided by its SCR is known as the insurer's "SCR coverage ratio" and is usually expressed as a percentage number (so that an SCR coverage ratio of 100% would mean that the insurer's Own Funds equalled its SCR). It should be appreciated, however, that what might appear a material difference in SCR coverage ratio may not equate to a material difference in the likelihood of remaining solvent for a year. So, for example, Mr. Dumbreck calculated that in the case of Rothesay, an SCR coverage ratio of 100% equates to a likelihood of its assets being sufficient to cover its Technical Provisions in one year's time of 99.5%; an SCR coverage ratio of 130% would equate to a likelihood of its assets being sufficient to cover its Technical Provisions in one year's time of 99.96%; and an SCR coverage ratio of 150% would equate to a likelihood of its assets being sufficient to cover its Technical Provisions in one year's time of 99.994%. So a reduction in SCR coverage ratio from 150% to 130% would only mean that the risk of insolvency after one year has increased by 0.034%.
48. The net amount by which an insurer's Own Funds exceeds its SCR represents the surplus (or excess) capital of the insurer for Solvency II purposes. At least in theory, an insurer could seek to distribute any such surplus or excess. It is, however, common for insurers to commit extra capital to be held in addition to the SCR. This additional level of capital is intended to provide a company with comfort that even if a moderately severe event occurred, it would still have sufficient capital to cover its SCR in full. The amount of such additional capital is determined by the insurer's capital management policy which is reviewed by the PRA.
Relevant legislation
The distinctions to be drawn between different types of insurance business
The main authorities
London Life
Re Axa Equity & Law Life Assurance Society plc
"(1) The 1982 Act confers an absolute discretion on the Court whether or not to sanction a scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the Company's constitution to its directors.
(2) The Court is concerned whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme.
(3) This is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the scheme with what would be the result if the scheme were implemented. For the purpose of this comparison the 1982 Act assigns an important role to the Independent Actuary to whose report the Court will give close attention.
(4) The FSA by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected. Again the Court will pay close attention to any views expressed by the FSA.
(5) That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the Court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.
(6) It is not the function of the Court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the Court may deem fair, it is the Company's directors' choice which to pursue.
(7) Under the same principle the details of the scheme are not a matter for the Court provided that the scheme as a whole is found to be fair. Thus the Court will not amend the scheme because it thinks that individual provisions could be improved upon.
(8) It seems to me to follow from the above and in particular paragraphs (2) (3) and (5) that the Court, in arriving at its conclusion, should first determine what the contractual rights and reasonable expectations of policyholders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policyholders if the scheme is put into effect".
Re Royal Sun Alliance Insurance plc
"… fairness is not usually, if ever, an issue which arises in relation to the transfer of general business. As I have said, the concern of general insurance policyholders is whether their claims will be paid. That is not a question of fairness; it is a question of ensuring that the transferee is in a financial position to meet those claims as and when they are made. In contrast, fairness is at the heart of the conduct of with-profits business in circumstances where the insurer, through its own appointed actuary, has to make judgments as to how profits are to be allocated, the extent to which there are to be bonuses, whether on an annual or terminal basis, and judging the interests of different groups of policyholders, as well as the company and its shareholders".
"Accordingly, in approaching this application I shall be concerned to see whether there is any material adverse effect on the position of policyholders in any of the three groups to which I have referred. The word "material" is important. The court is not concerned to address theoretical risks. It might be said that a transfer of business from a very large company to a large company involved a reduction in the cover available to the transferring policyholders, but assuming that the transferee is in a financially strong position it matters not that the level of cover in the transferee is less than that in the transferor. What the court is concerned to address is the prospect of real, as opposed to fanciful, risks to the position of policyholders".
Re Scottish Equitable plc
"Care must be taken over the use of the word "fair". This is not the subjective view of a policyholder or even of the judge. An objective view must be formed, a view reached against the objective standards and the factors appropriate to take into account. To take an extreme example, a scheme would not be unfair because it transferred business from a Scottish company to an English company even though a particular policyholder selected the company in the first place precisely because it was Scottish rather than English".
"114. … Miss Hutchins emphasises the unfairness, as she sees it, of compelling her elderly father to transfer to a new company from the venerable [Scottish Equitable] which he deliberately chose. He wants to be given a choice, in particular to transfer to LGAS rather than to [Rothesay].
115. There are two points to make. Firstly, the venerable position of SE is not, I am afraid, of itself a relevant factor. Even venerable institutions can fail as those who work in this area of the law are well aware. In any case, SE is part of a group, about the age and venerability of which I have no idea. So the point, if it had any force, is not made good.
116. Secondly, a newish body, that is to say, RL, is not to be regarded as an unsuitable provider simply because it is new otherwise we could never have new entrants into the market for transfers. The question is not its age but its financial strength, record and expectations. As to this, the independent expert and the regulators are clearly satisfied about its financial strength, there is no criticism made of its record, and I have no reason to think that it will not be properly and prudently managed into the future".
Re Barclays Bank plc
"in exercising its discretion, the court must keep in mind, in addition to the contextual and other matters I have already mentioned, the following main factors:-
(i) The court's discretion is unfettered and genuine and is not to be exercised by way of a rubber stamp.
(ii) The design of a ring-fencing transfer scheme is a matter for the board of the bank concerned. There may be many possible approaches to the design of a statutorily-compliant ring-fencing transfer scheme that will affect stakeholders differently. The choice is for the directors of the bank concerned, acting properly in accordance with their duty under section 172(1) of the Companies Act 2006 (which is to act in the way they consider, in good faith, would be most likely to promote the success of the company having regard to matters including those specified in that subsection).
(iii) The adverse effects of a ring-fencing transfer scheme must be viewed through the lens of the statutory question, so that the court must consider, with the aid of the Skilled Person, first whether persons other than the transferor are likely to be adversely affected by the scheme, and, if so, whether the adverse effect is likely to be greater than is reasonably necessary in order to achieve the statutory purposes. In considering whether persons are likely to be adversely affected by the scheme, regard need only be had to those adverse effects that are (i) possibilities that cannot sensibly be ignored having regard to the nature and gravity of the feared harm in the particular case, (ii) a consequence of the scheme, and (iii) material in the sense that there is the prospect of real or significant, as opposed to fanciful or insignificant, risk to the position of the stakeholder concerned.
(iv) Even if the statutory question is answered negatively, it will not automatically follow that a proposed scheme will be rejected. The court's approach will depend on all the circumstances, including the balance between the chosen design of the scheme, the benefits that will be achieved by the scheme, and the nature of the adverse effects identified, all viewed through the lens of the approach inherent in the statutory question itself.
(v) The court will give weight to the views expressed to it by the Skilled Person and by the Regulators, and will fairly evaluate the weight to be given to views expressed to it in statements of representations made by stakeholders".
Snowden J's judgment
"117. I agree with Warren J that the fact that Part VII exists means that policyholders are not given a veto over what insurers wish to do for commercial reasons. But neither, in my judgment, is there any presumption in favour of a transfer for such reasons. In each case a balance has to be struck, and it must be for the commercial parties to the proposed transfer to satisfy the court that "in all the circumstances of the case, it is appropriate" to sanction a change to the contractual status of the policyholders.
118. I would also accept that in striking the balance of interests to which Warren J referred, any purely subjective likes or dislikes of policyholders carry little or no weight. That was, I believe, what Warren J had in mind in paragraph [63] of Scottish Equitable when he gave, as an extreme example, a policyholder who objected to a scheme for the transfer of business from a Scottish company to an English company. It was also the reason why (at paragraphs [95]-[98]) Warren J rejected the objection from a policyholder that he simply "did not like" Rothesay, and had made a number of unsubstantiated allegations about Goldman Sachs which, at the time, was a shareholder of Rothesay. But as I have indicated, I do not consider (and I do not believe that Warren J decided) that the only factors that the court can take into account are those that can be reduced to part of an actuarial or risk-based analysis".
The issues
i) Whether (a) the judge was wrong to conclude that there was a material disparity between the external support potentially available for each of PAC and Rothesay, and/or (b) he failed to accord adequate weight to the conclusions of the independent expert that the risk of PAC or Rothesay needing external support in the future was remote (the "security of benefits issue").
ii) Whether the judge failed to accord adequate weight to the Regulators' lack of objection to the Scheme and to the continuing future regulation of Rothesay (the "regulatory issue").
iii) Whether the judge accorded too much weight to the fact that the objecting policyholders chose 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 "reputational issue").
i) Whether the judge failed to accord adequate weight to the commercial judgment of PAC's board (the "commercial judgment issue").
ii) Whether the judge failed to accord adequate weight to the prejudice that a refusal to sanction would cause to PAC and Rothesay (the "prejudice issue").
The approach to the sanction of applications under Part VII
Issue 1: the security of benefits issue: (a) Was the judge wrong to conclude that there was a material disparity between the external support potentially available for each of PAC and Rothesay, and/or (b) did he fail to accord adequate weight to the conclusions of the independent expert that the risk of PAC or Rothesay needing external support in the future was remote?
Issue 2: the regulatory issue: Did the judge fail to accord adequate weight to the Regulators' lack of objection to the Scheme, and the continuing future regulation of Rothesay?
The risk that external support might be needed
The relevance of a disparity in available external support
The weight given to the expert's view of the need for external support
The weight given to the Regulators' non-objection and future regulation
Conclusions on Issues 1 and 2
i) The judge was wrong to find that there was a material disparity between the non-contractual external financial support potentially available for each of PAC and Rothesay;
ii) The judge ought not anyway to have regarded such a disparity as a material factor;
iii) The judge failed to accord adequate weight to the independent expert's conclusion that the risk of PAC or Rothesay needing external support in the future was remote; and
iv) The judge failed to accord adequate weight to the Regulators' lack of objection to the Scheme, and the continuing future regulation of Rothesay.
Issue 3: the reputational issue: Did the judge accord too much weight to the fact that the objecting policyholders chose PAC on the basis of its age, venerability and established reputation, and reasonably assumed that PAC would provide their annuity throughout its lengthy term?
"63. [fairness] is not the subjective view of a policyholder or even of the judge. An objective view must be formed, a view reached against the objective standards and the factors appropriate to take into account. To take an extreme example, a scheme would not be unfair because it transferred business from a Scottish company to an English company even though a particular policyholder selected the company in the first place precisely because it was Scottish rather than English. …
114. … Miss Hutchins emphasises the unfairness, as she sees it, of compelling her elderly father to transfer to a new company from the venerable SE which he deliberately chose. He wants to be given a choice, in particular to transfer to LGAS rather than to RL.
115. There are two points to make. Firstly, the venerable position of SE is not, I am afraid, of itself a relevant factor. Even venerable institutions can fail as those who work in this area of the law are well aware. …
116. Secondly, a newish body, that is to say, RL, is not to be regarded as an unsuitable provider simply because it is new otherwise we could never have new entrants into the market for transfers. The question is not its age but its financial strength, record and expectations".
Issue 4: the commercial judgment issue: Did the judge fail to accord adequate weight to the commercial judgment of PAC's board?
Issue 5: the prejudice issue: Did the judge fail to accord adequate weight to the prejudice that a refusal to sanction would cause to PAC and Rothesay?
Issue 6: the disposal issue: If the answer to one or more of these issues is yes, what is the consequence for the appeal?
Conclusion
Note 1 See paragraph 76 of the PRA’s approach to insurance supervision published in October 2018 and cited at [95] below. [Back] Note 2 At the time of Snowden J’s judgment. [Back] Note 3 Unless otherwise stated, references to section numbers in this judgment are to FSMA.
[Back] Note 4 It is not relevant that these and other provisions have been amended on the UK’s departure from the European Union by the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, SI 2019/632.
[Back] Note 5 Various regulations have been made under section 108.
[Back] Note 6 Defined in section 103A. In this case, the PRA was the appropriate regulator.
[Back] Note 8 Section 110(1)(b). [Back] Note 10 Referring to Re Zurich Assurance Limited and Scottish Widows Limited [2019] EWHC 1778 (Ch) where the Chancellor had observed at [12] that the holders of workplace pension policies with Zurich who were concerned about having to change providers were making a “reasonable point”, but would be at liberty, if they did not wish to remain with Scottish Widows after the scheme took effect, to change to another provider.
[Back] Note 11 See Axa at [6(3)], and Royal Sun Alliance at [7]-[10]. [Back] Note 12 Which the judge said was in accordance with the views of another independent expert, and the way in which PAC presented its case to him in seeking approval for another Part VII scheme to transfer insurance business to an Irish subsidiary in the context of Brexit in Re Prudential Assurance Company Limited [2018] EWHC 3811 (Ch) at [36]. [Back] Note 13 Blackstone sold their stake in Rothesay to GIC and MassMutual in September 2020.
[Back] Note 14 See David Richards J at [11] inRoyal Sun Alliance. [Back] Note 15 See [54] above. [Back] Note 16 As Mr Dumbreck explained at [4.12] of his main report, the MCR calculation is lower, simpler, more formulaic and less risk-sensitive than the SCR calculation. The MCR is the amount required to ensure that the firm’s assets continue to exceed its Technical Provisions over a one-year time frame with a probability of 85%. Where there is a breach of the MCR, a short-term realistic finance scheme is required to restore eligible Own Funds to at least the level of the MCR or to reduce the firm’s risk profile to ensure compliance with the MCR (see articles 129(1)(c) and 139 of Solvency II).
[Back] Note 17 Article 101(3) of Solvency II.
[Back] Note 18 Paragraph 4.7 of the independent expert’s report, recitals (2)-(36) of Solvency II, and articles 51-56 of Solvency II.
[Back] Note 19 Paragraph 36 of the PRA’s approach to insurance supervision published in October 2018.
[Back] Note 20 See [4.8] of Mr Dumbreck’s first report.
[Back] Note 21 Recital 55 and articles 76(2) and 77 of Solvency II.
[Back] Note 22 Article 77 of Solvency II.
[Back] Note 23 See [17] of the PRA’s third report.
[Back] Note 24 See articles 101(3) and (4) of Solvency II.
[Back] Note 25 Paragraphs 77 and 89 of the PRA’s approach to insurance supervision published in October 2018. [Back] Note 26 See the judgment at [137]-[146].
[Back] Note 27 At [154] and [181]. [Back] Note 28 See [99] above.
[Back] Note 29 See [100(i)], [109(iii)] and [111] in the Chancellor’s judgment inBarclays. [Back]