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24th November 2016

The Regulators on Insurance Special Purpose Vehicles (ISPVs)

The FCA and PRA have entered into a joint consultation (FCA CP16/34 or PRA CP42/16) in relation to the regulatory authorisation and supervision of Insurance Special Purpose Vehicles (ISPVs) - with particular regards to Insurance Linked Securities (ILS) business.

HM Treasury Consultation on ILS business

At present, HM Treasury has entered a second consultation on regulations that will introduce a new regulatory and tax framework for Insurance Linked Securities (ILS) business. The first consultation upon this subject sought initial views on the regulatory, tax and corporate structure framework for ILS business whilst the second consultation looks to sets out additional details on the proposed new approach and implementation. This new framework is time-tabled to take effect sometime in the Spring of next year (2017).

Included within the new framework is the proposal that includes a new corporate structure – the Protected Cell Company (PCC). The structure of a PCC is ‘intended to allow each contract for risk transfer to be established as a separate cell.’

Once the new regulatory framework has been implemented, the UK regulators (FCA and PRA) will then expect to be able to accept applications for authorisation of ISPVs.

Insurance Risk Transformation will be a new regulatory activity that is introduced and for which ISPVs will need to apply. Additionally, the PRA is also consulting upon new authorisation forms for this purpose.

Since ISPVs are entities that are regulated by both the UK regulators (i.e. dual-regulated firms), they will still need to apply to the PRA for their authorisation for this activity. The FCA will then need to give consent for approval of the authorisation.

The regulators are encouraging applicants for this new regulatory activity to ‘engage with the regulators prior to submitting’ their applications, particularly given the time-sensitive nature of Insurance Linked Securities transactions.

Assuming that a firm engages with the regulators prior to application and the entity’s proposal is relatively straight-forward (and accompanied by good quality supporting documentation), the regulators anticipate that applications should be determined within 6-8 weeks.

Other implications of the new framework:

Once the new protected cell company (PCC) corporate structure has been established, it is the Financial Conduct Authority (FCA) rather than Companies House that intends to be responsible for a PCC’s registration and incorporation.

The consultation proposes that prior to an ISPV establishing any new cells, the PRA would require the ISPV to notify them and submit a pre-transaction notification form, which would also be reviewed by the FCA.

Next Steps:

The joint consultation will continue until the 23rd February 2017, which is the deadline for receiving comments on the regulators proposals. Following the consultation, the regulators will look to see how best to incorporate the new ILS framework into the FCA’s regulatory Handbook at the start of next year.

• CP16/34: Authorisation and supervision of insurance special purpose vehicles

ISPVs Authorisation & Supervision by the Regulators