The Risk Transformation Regulations 2017

Made: 5th December 2017

Coming into force in accordance with regulation 1(2)

The Treasury are a government department designated for the purposes of section 2(2) of the European Communities Act 1972 in relation to financial services.

In the opinion of the Treasury, one of the effects of these Regulations is that an activity which is not a regulated activity, within the meaning of the Financial Services and Markets Act 2000 , will become a regulated activity.

In the opinion of the Treasury, one of the effects of these Regulations is that an activity will become a PRA-regulated activity within the meaning of the Financial Services and Markets Act 2000 .

A draft of these Regulations has been laid before and approved by a resolution of each House of Parliament in accordance with paragraph 2 of Schedule 2 to the European Communities Act 1972 and sections 22B and 429(1) and (2) of, and paragraph 26(2) of Schedule 2 to, the Financial Services and Markets Act 2000 .

The Treasury, in exercise of the powers conferred by section 2(2) of the European Communities Act 1972 and sections 22(1) and (5), 22A, 55C, 284A, 426 and 428(3) of, and paragraph 25 of Schedule 2 to, the Financial Services and Markets Act 2000 , make the following Regulations:

PART 1 — General

Citation and commencement

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• (1) These Regulations may be cited as the Risk Transformation Regulations 2017.

• (2) These Regulations come into force 3 days after the day on which they are made.

Interpretation: general

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• (1) In these Regulations—

• “alternative inspection location” means any place at which a protected cell company keeps the documents and records relating to the protected cell company, other than the protected cell company's registered office;

• “appropriate registrar” means—the registrar of companies for England and Wales if a protected cell company's instrument of incorporation states that its registered office is situated in England and Wales (or Wales);the registrar of companies for Scotland if a protected cell company's instrument of incorporation states that its registered office is situated in Scotland;the registrar of companies for Northern Ireland if a protected cell company's instrument of incorporation states that its registered office is situated in Northern Ireland;

• “asset” includes any interest in an asset, any right over an asset or any property;

• “cell” has the meaning given in regulation 43;

• “contractual arrangement” has the same meaning as in the Implementing Technical Standard;

• “core” has the meaning given in regulation 42;

• “counsel” means a person who is—a barrister within the meaning given in section 207 of the Legal Services Act 2007 ;a practising member of the faculty of advocates in Scotland; ora barrister who has been called to the bar in Northern Ireland and who holds a current practising certificate;

• “creditor” incudes a contingent or prospective creditor;

• “debenture” includes debenture stock, bonds and any other securities;

• “FSMA” means the Financial Services and Markets Act 2000;

• “general meeting” means a meeting of the persons holding voting shares issued on behalf of the core of the protected cell company;

• “Implementing Technical Standard” means Commission Implementing Regulation (EU) 2015/462 of 19th March 2015 laying down implementing technical standards with regard to the procedures for supervisory approval to establish special purpose vehicles, for the cooperation and exchange of information between supervisory authorities regarding special purpose vehicles as well as to set out formats and templates for information to be reported by special purpose vehicles in accordance with Directive 2009/138/EC of the European Parliament and of the Council ;

• “insolvency legislation” means—the Insolvency Act 1986 ;the Insolvency (Northern Ireland) Order 1989 ;Part 24 of FSMA (insolvency);the Insolvency Act 2000 ;the Insolvency (Northern Ireland) Order 2002 ;the Bankruptcy (Scotland) Act 2016 ; andall subordinate legislation made under the legislation mentioned in sub-paragraphs (a) to (f);

• “liability” includes a contingent or prospective liability;

• “non-voting share” means a share which is not a voting share;

• “officer” includes a director or manager;

• “property” includes an interest in property or a right over property;

• “the Regulated Activities Order” means the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ;

• “share” means a share in the share capital of a protected cell company or a part of a protected cell company;

• “share certificate” means documentary evidence of title to a share;

• “solicitor” means a person who is—a solicitor within the meaning given by section 207 of the Legal Services Act 2007;enrolled on the roll of solicitors kept under section 7 of the Solicitors (Scotland) Act 1980 ; ora solicitor within the meaning given by Article 3(2) of the Solicitors (Northern Ireland) Order 1976 ;

• “voting share” means a share which confers the right to vote on a written resolution of the protected cell company or at a meeting of shareholders;

• “working day” has the meaning given in section 1173(1) of the Companies Act 2006 .

• (2) In these Regulations—

• (a) a reference to a part of a protected cell company is a reference to the core or a cell of the protected cell company (see regulations 42 and 43);

• (b) a reference to enforceable arrangements between cells is a reference to arrangements between cells which—

• (i) have been made in accordance with regulations 68 and 69; and

• (ii) have not been cancelled in accordance with regulation 70; and

• (c) shares are of one class if the rights attached to them are in all respects uniform.

• (3) Where these Regulations refer to the Welsh equivalent of a word or expression, the Welsh equivalent of that word or expression is set out in Table 6 in Schedule 1.

• (4) Any reference in these Regulations to any EU regulation, EU decision or EU tertiary legislation (within the meaning of section 20 of the European Union (Withdrawal) Act 2018 (“the 2018 Act”)), is, unless the contrary intention appears, to be treated as a reference to that EU regulation, EU decision or EU tertiary legislation as it forms part of domestic law by virtue of section 3 of the 2018 Act.

Meaning of “group of cells”

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• (1) In these Regulations, a “group of cells” is a group of two or more cells in which each cell is linked to every other cell in the group.

• (2) For the purposes of this regulation, two cells (“cell A” and “cell B”) are linked if the protected cell company has made enforceable arrangements between—

• (a) cell A and cell B; or

• (b) cell A and another cell which is linked to cell B.

PART 2 — Authorisation and supervision of insurance risk transformation

Amendment of FSMA

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• (1) FSMA is amended as follows.

• (2) In Schedule 6 (threshold conditions) —

• (a) in Part 1D (Part 4A permission: conditions for which the PRA is responsible in relation to insurers etc), in paragraph 4A (introduction), after sub-paragraph (4), insert—

(5) If the person concerned (“C”) carries on, or is seeking to carry on, regulated activities which consist of or include a PRA-regulated activity relating to an assumption of risk falling within article 13A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the threshold conditions which are relevant to the discharge by the PRA of its functions in relation to C are the conditions set out in paragraphs 4B to 4F, subject to sub-paragraph (6). (6) Paragraphs 4B to 4F have effect in relation to persons of the kind specified by sub-paragraph (5) as if— (a) the persons are special purpose vehicles within the meaning given by Article 13(26) of the Solvency 2 Directive ; (b) the persons are not reinsurance undertakings within the meaning given by Article 13(4) of the Solvency 2 Directive; (c) references to contracts of insurance are references to contracts for the assumption of risk; and (d) references to C's policyholders are references to undertakings from whom C assumes a risk.

• (b) in Part 1E (Part 4A permission: conditions for which the PRA is responsible in relation to other PRA-authorised persons), in paragraph 5A (introduction)—

• (i) at the end of sub-paragraph (b), omit “or”;

• (ii) at the end of sub-paragraph (c), insert “ or ”; and

• (iii) after sub-paragraph (c), insert—

(d) an assumption of risk falling within article 13A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001,

Amendment of the Regulated Activities Order

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• (1) The Regulated Activities Order is amended as follows.

• (2) After article 12A (information society services and managers of UCITS and AIFs) insert—

(12B) A transformer vehicle does not carry on an activity of a kind specified by article 10 by assuming a risk from an undertaking, provided the assumption of the risk is a specified kind of activity falling within article 13A (transformer vehicles: insurance risk transformation).

• (3) After article 13 (application of sections 327 and 332 of FSMA) insert—

(13A) It is a specified kind of activity for a transformer vehicle to assume a risk from an undertaking where— (a) the undertaking assumes a risk under a contract of insurance (“the underlying risk”); and (b) the assumption of risk by the transformer vehicle has the legal or economic effect of transferring some or all of the underlying risk to the transformer vehicle.

• (4) After article 19 (risk-management) insert—

(19A) A transformer vehicle does not carry on an activity of a kind specified by article 14 by assuming a risk from an undertaking, provided the assumption of the risk is a specified kind of activity falling within article 13A (transformer vehicles: insurance risk transformation).

Amendment of the Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013

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In the Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013 in article 2 (regulated activities which are PRA-regulated activities), after paragraph (c) insert—

(ca) the activity carried out by a transformer vehicle when it assumes a risk from an undertaking, as specified by article 13A of the Regulated Activities Order;

Limitation on transformer vehicles' activities

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• (1) When the PRA gives permission under Part 4A of FSMA for a transformer vehicle to carry on regulated activities, the PRA must exercise its discretion under section 55F(4)(a) of FSMA to incorporate in the description of those regulated activities a limitation on the scope of the regulated activities which the transformer vehicle may carry on.

• (2) The limitation on the scope of the regulated activities referred to in paragraph (1) must be determined by reference to some or all of the activities described in the application for Part 4A permission made by or on behalf of the transformer vehicle.

• (3) Where—

• (a) the PRA proposes to exercise its discretion under section 55F(4)(a) of FSMA pursuant to the duty imposed on the PRA by paragraph (1); and

• (b) the person applying for Part 4A permission consents to the proposed exercise of that discretion,

the PRA need not give a warning notice relating to the proposed exercise of that discretion pursuant to section 55X(1)(a) of FSMA.

• (4) Where—

• (a) the PRA decides to exercise its discretion under section 55F(4)(a) of FSMA pursuant to the duty imposed on the PRA by paragraph (1); and

• (b) the person applying for Part 4A permission consents to the exercise of that discretion,

the PRA need not give a decision notice relating to the exercise of that discretion pursuant to section 55X(4)(a) of FSMA.

• (5) After the PRA has given permission under Part 4A of FSMA for a transformer vehicle to carry on regulated activities, the PRA may exercise its discretion under section 55I(1)(c) or 55J(3)(a) of FSMA to vary the limitation referred to in paragraph (1), provided the PRA maintains a limitation on the scope of the regulated activities which the transformer vehicle may carry on.

• (6) A variation to the limitation referred to in paragraph (5) must ensure that the limitation is determined by reference to some or all of the activities which the transformer vehicle carries on or proposes to carry on.

Disapplication of Part 12 of FSMA

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Part 12 of FSMA (control over authorised persons) does not apply in relation to a person who decides to acquire or increase control, or reduce or cease control, over a transformer vehicle carrying on the activity specified in article 13A of the Regulated Activities Order.

Transformer vehicles which are not Solvency 2 special purpose vehicles

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART 3 — Offers of investments by transformer vehicles

Meaning of “qualified investor”

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• (1) In this Part, “qualified investor”, in relation to an offer of investments, means a person—

• (a) described in paragraph 3(a) of Schedule 1 to MIFIR;

• (b) recognised by the Financial Conduct Authority (“FCA”) as an eligible counterparty for the purposes of Section 6 of Chapter 3 of the Conduct of Business sourcebook in the Handbook of Rules and Guidance published by the FCA containing rules made by the FCA under FSMA, as the sourcebook has effect on IP completion day; or

• (c) in respect of whom the conditions mentioned in paragraph (2) are satisfied.

• (2) The conditions referred to in paragraph (1)(c) are satisfied in respect of a person (“the proposed investor”) where—

• (a) the proposed investor confirms in writing to the person making the offer (“the offeror”) that the proposed investor is to be treated as a qualified investor for the purposes of this Part;

• (b) the offeror carries out an assessment of the proposed investor's expertise, experience and knowledge;

• (c) the offeror concludes from the assessment referred to in sub-paragraph (b) that—

• (i) the proposed investor is capable of making an informed decision to acquire the investments; and

• (ii) the proposed investor understands the risks involved in acquiring the investments;

• (d) the offeror's conclusion referred to in sub-paragraph (c) is reasonable; and

• (e) the proposed investor provides sufficient evidence to the offeror that the proposed investor satisfies at least two of the following criteria—

• (i) the proposed investor has entered into or arranged at least 40 transactions in the reinsurance markets in the period of one year ending on the date on which confirmation is given under sub-paragraph (a);

• (ii) the proposed investor has a portfolio of cash deposits and other financial instruments, the value of which exceeded £425,000 at any time in the period of two weeks ending on the date on which confirmation is given under sub-paragraph (a);

• (iii) the proposed investor has worked for at least one year in a professional capacity in the financial sector and the proposed investor's role required knowledge of the reinsurance markets.

• (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (4) In this regulation—

• (a) “financial instrument” means a financial instrument listed in Part 1 of Schedule 2 to the Regulated Activities Order;

• (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (da) “MIFIR” means Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments; and

• (e) “reinsurance markets” includes the markets in insurance linked securities.

Investments to be offered only to qualified investors

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• (1) A transformer vehicle must not offer to any person who is not a qualified investor an investment issued by the transformer vehicle.

• (2) A transformer vehicle must take such steps as are reasonable in the circumstances to prevent an investment issued by the transformer vehicle to a qualified investor from being offered subsequently to a person who is not a qualified investor.

• (3) A contravention of paragraph (1) or (2) is actionable, at the suit of a person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.

PART 4 — Protected Cell Companies

CHAPTER 1 — Overview

Overview

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• (1) This Part enables the creation of a type of body corporate called a protected cell company.

• (2) A protected cell company is a transformer vehicle which is intended to be used as a multi-arrangement special purpose vehicle (within the meaning given by Article 2 of the Implementing Technical Standard).

• (3) As a result, the protected cell company may only be used to carry out the activities mentioned in regulation 57.

• (4) A protected cell company is comprised of different parts, namely the core and the cells created by the protected cell company after its registration and authorisation.

• (5) The core administers the protected cell company.

• (6) The cells are used for assuming risk from undertakings, issuing investments to investors to fund the protected cell company's exposure to that risk, holding the proceeds of sale of those investments and, where permitted by the protected cell company's instrument of incorporation, entering into arrangements between cells.