With this it will be convenient to discuss the following:
Government amendments 32 and 33.
That schedule 12 be the Twelfth schedule to the Bill.
That schedule 13 be the Thirteenth schedule to the Bill.
Clause 51 introduces schedules 12 and 13. The UK insurance industry is the largest in Europe and the fourth largest in the world, managing investments of more than £1.8 trillion. It is an incredibly important part of our financial services sector. The UK’s insurance sector is robustly regulated and supervised, well capitalised and resilient to shocks; as a result, insurer insolvency is uncommon. However, as the UK is a global financial centre, the Government are through the Bill enhancing the powers available to the authorities to manage an insurer in financial distress. That will strengthen protections for policyholders and mitigate potential value destruction when an insurer fails.
Schedule 12 makes provision for the powers of the court in relation to the liabilities of an insurer that is, or is likely to become, unable to pay its debts. I will describe its key provisions. The schedule defines an order made in the exercise of such powers as a write-down order, which involves reducing the value of an insurer’s contracts. It makes amendments to FSMA that are designed to make the new procedure more viable for an ailing insurer.
Part 2 of the schedule introduces the new role of a write-down manager—an officer of the court who will monitor a write-down. The manager will consider, on an ongoing basis, whether a write-down remains likely to lead to a better outcome for an insurer’s creditors and policyholders than if the write-down were not in effect.
Part 4 of the schedule provides for the PRA to amend its rules governing the Financial Services Compensation Scheme, requiring the scheme to provide top-up payments to certain policyholders affected by write-down orders. This safeguard aims to ensure that FSCS-protected policyholders are not worse off following a write-down than they would have been in insolvency.
Amendments 32 and 33 ensure that the drafting meets full policy intent. Amendment 32 ensures that the moratorium on legal proceedings does not interfere with certain collateral and security arrangements among participants in the financial markets. It also provides the Treasury with the power to amend the list of exclusions, which is given legal force by amendment 33. Both amendments mirror exclusions and a similar power to amend the exclusions contained in schedule 13.
Schedule 13 inserts proposed new schedule 19C into FSMA. It introduces provisions for the enforcement of contracts while an insurer is undergoing a write-down or certain insolvency proceedings. The changes are intended to provide certainty and stability to an ailing insurer’s financial position. The schedule defines “financial difficulties” and provides for restrictions on policyholder surrender rights when an insurer is judged to be in such difficulties.
Surrender rights allow policyholders to surrender life insurance contracts in exchange for cash value. Annual withdrawals of up to 5% of the policy value will continue to be permitted. The provisions will mitigate against the possibility of mass surrenders by policyholders, which could further destabilise an insurer in financial difficulties. However, part 2 of schedule 13 also enables specific parties, including the court, to consent to a surrender when satisfied that not doing so would cause hardship to a person.
Part 3 of schedule 13 provides that while an insurer is in financial difficulties, relevant contracts to which the insurer is party cannot terminate because the insurer is in financial difficulties. That seeks to mitigate the risk of value destruction, business disruption, policyholder harm and cost arising from the contracts being terminated.
The provisions enhance the powers available to the UK regulatory authorities and courts to manage an insurer in financial distress. That will strengthen protection for policyholders and mitigate potential value destruction at the point of failure. I therefore recommend that clause 51 and schedules 12 and 13 stand part of the Bill.