Scottish Equitable PLC & Anor, Re

MR JUSTICE LEECH : 1. By a Claim Form dated 2 February 2024 the Claimants, Scottish Equitable Plc (“SE”) and the Royal London Mutual Insurance Society Limited (“Royal London”), apply for an order that the Court sanction an insurance business transfer scheme of SE’s portfolio of individual protection business (the “Transferring Business”) to Royal London (the “Scheme”) under section 111(1) of the Financial Services and Markets Act 2000 (“FSMA”) together with certain ancillary orders under section 112 of FSMA. 2. The rationale for the Scheme is set out in section 2 of the first Witness Statement for SE made by Mr James Ewing, its CFO, and also dated 2 February 2024. The Transferring Business consists of a portfolio of life, critical illness and income protection policies for individual customers sold via independent financial advisers. It had 417,432 policies as at the end of June 2023 representing approximately 10.6% of SE’s business by number and 2% of its capital requirements. 3. Following a strategic review during 2022 SE concluded that the business was not core to the Aegon group of which SE and its business now forms a part and that other areas of the group’s business were likely to achieve higher returns. SE’s board concluded that it was not in the interests of SE to retain the business and that it should be closed to new business and sold. Mr Ewing sets out the various factors which the board has taken into account in reaching that conclusion and on 4 February 2023 SE entered into a framework agreement with Royal London under which it undertook to transfer the Transferring Business to Royal London on the effective date under the Scheme (on the assumption that the Court gave its sanction). 4. In his first independent expert’s report dated 22 February 2024 (the “First IE Report”) Mr Stephen Makin of Hymans Robertson LLP, the independent expert, provided a breakdown of the policies together with the nature of the cover and benefits which they provide. 205,000 consisted of level life term insurance, 62,000 consisted of reducing life term insurance, 73,000 consisted of critical illness insurance or life insurance with critical illness and the balance of about 77,000 consisted of a range of various policies such as income protection policies. From this analysis it is clear that none of them involve a “with profits” element. Mr Makin pointed out that Royal London viewed the transfer as an opportunity to increase the size of its portfolio of protection business and to generate an attractive return for the members who receive a share of its profits. 5. I begin with some technical procedural issues. Section 111(2) of FSMA provides that certain conditions must be satisfied before the Court may sanction the Scheme. For the reasons set out in Part 2 of the Skeleton Argument dated 12 June 2024 of Mr Martin Moore KC, who appeared for both Claimants, I am satisfied that those conditions are met. I have also seen the PRA certificate dated 6 June 2024. 6. The Financial Services and Markets Act 2000 (Control of Business Transfers) (Requirements on Applicants) Regulations 2001 set out the steps which must be taken to notify policyholders. On 28 February 2024, ICC Judge Burton made an order for directions dealing with those aspects of the claim. The order recited that the judge was satisfied that the steps intended to be taken by the Claimants were satisfactory and also with the means by which the relevant documents could be obtained by policyholders. 7. I have also read the witness statement of Mr Brian Christie, the oversight director of SE, who had overall responsibility for the communication strategy and the notification of policyholders. Mr Makin also pointed out in his supplementary report dated 31 May 2024 (the “Second IE Report”) that SE had issued 389,607 notification packs to policyholders and as at 22 May 2024 had received 13,403 responses representing about 3.4% of the packs issued. 8. I am satisfied that the Claimants have complied with the Regulations subject to the waiver or dispensations in the directions order made by the ICC Judge. In reaching this conclusion, I make it clear that I have taken into account the fact that SE was unable to implement a suggestion made by ICC Judge Burton and the reasons for that which Mr Moore drew to my attention. 9. I turn therefore to the exercise of discretion. The Court of Appeal gave authoritative guidance to this Court as to how to approach the sanction of a scheme under Part 7 in Re Prudential Assurance Company Ltd [2020] EWCA Civ 1626 at [75] to [86]. Sir Geoffrey Vos C (as he then was) gave the judgment of the Court and he indicated that the paramount concern of the Court will be to assess whether the transfer would have any material adverse effect on policyholders or creditors of both the transferor and transferee. He also stated that the first duty of this Court is to scrutinise the report of the independent expert and the evidence of any person required to be heard under section 110 with a view to identifying any errors, omissions or instances of inadequate or defective reasoning. 10. I have read both IE reports and the addendum to those reports which Mr Makin filed yesterday. I have also read the first and second reports of the PRA and the first and second reports of the FCA, neither of which oppose the sanction of the Scheme. Mr Makin set out his terms of reference in the first IE report. He also made it clear that he had had regard to the guidance in Re Prudential in considering what is material for these purposes. He summarised his conclusions in the First IE Report in paragraph 1.3 of the Second IE Report: “The conclusions drawn in the Scheme report were as follows. I was satisfied that the Scheme will not have a material adverse effect on the benefit security of any group of policies. I was satisfied that the Scheme will not have a material adverse effect on the benefit expectations of any group of policyholders. I did not expect the Scheme to result in any changes to the standards of service for or the management and governance of any group of policies. I was satisfied that the Scheme is equitable to all classes and generations of SE Plcs and Royal London’s policyholders. I was satisfied that the Scheme will not have a material adverse effect on SE Plcs reinsurers whose contracts will be transferred to Royal London or on Royal London’s existing reinsurers. I was also satisfied that the Scheme will not have a material adverse effect on any of the parties’ outsource service providers, pension schemes, creditors or insurance subsidiaries.” 11. After providing certain updating information, he expressed the view that he remained satisfied that the Scheme was not expected to have any material adverse effect on the security of benefits for any group of policyholders: see paragraph 2.15 of the Second IE Report. His addendum report dated 12 June 2024 dealt with further policyholders’ objections and insolvency UK developments (none of which affected the views which he expressed in his first two reports). 12. Having read all three reports and the comments of both the PRA and the FCA, I am not satisfied that there are any errors or omissions in Mr Makin’s reports or that there is any evidence of inadequate or defective reasoning on his part in reaching the conclusions which I have set out. Indeed, I find his evidence to be compelling. I therefore accept his evidence that the transfer of the Transferring Business by SE to Royal London will not have a material adverse effect on the policyholders of the business itself or of SE or Royal London or their creditors and other stakeholders. 13. I add that in accepting Mr Makin’s evidence, I have taken into account the various issues which the PRA and the FCA identified in their reports and to which Mr Moore has drawn my attention in his Skeleton Argument. In particular, I have taken into account the objections which were raised in writing by policyholders of the Scheme and Mr Makin’s commentary on them. I have also taken into account concerns raised about service standards and, in particular, concerns raised about the refinancing of Atos BPS Ltd’s parent company, the contingency planning undertaken by both SE and Royal London to meet this concern and the views expressed by Mr Makin about those contingency plans. 14. Finally, I have taken into account the fact that there have been developments in the “Solvency UK” regulatory regime and the duty of SE to consumers. I have also taken into account SE’s approach to sanctions and the effect of the Scheme on policyholders in both the Channel Islands and the Isle of Man. I note that in its second report the FCA confirmed that it was satisfied that the Scheme was within the range of reasonable and fair schemes available to SE and Royal London and did not object to the Scheme. I also note that in its second report the PRA stated that it was not currently aware of any issues which would cause it to object and that it did not object to the Scheme. 15. I therefore stand back and ask myself whether there are any other reasons why I should not sanction the Scheme. The only issues in evidence related to the outstanding objections of individual policyholders to the Scheme. In his first witness statement dated 13 June 2024 Mr Mohammad Akhtar, a partner in Pinsent Masons LLP, the firm of solicitors acting for SE, stated that as at 3 June 2024 SE had received fifty objections, five expressions of dissatisfaction and that since that date SE had received one additional objection. 16. I have considered all of the objections which were put in evidence and I have debated with Mr Moore some of the issues which have been taken by individual objectors. Mr Moore submitted that little weight should be attached to objections of the kind that were made and argued that the critical issue was whether the transfer would have a material adverse effect on the business given the nature of the policies (which were protection policies). He submitted that there was a real tangible benefit for policyholders in the transfer to Royal London given that it was currently non-core business and that it would be operated by Royal London for real benefit. 17. I accept that submission. Overall it seems to me that there is a sensible commercial rationale for the transfer which should be of benefit to policyholders even if that cannot be financially quantified, which outweighs the individual objections that individual policyholders may have on the grounds of usually the personal treatment that they have encountered. 18. For those reasons, therefore, I will sanction the Scheme. I have read the Scheme itself and Mr Moore took me through the draft form of order. In particular, he took me to paragraph 4 in which I am asked to make what he described as a “protected policies” order. He explained to me that this order will improve the prospects that HMRC will continue to recognise the subject policies as protected policies under Schedule 18 to the Finance Act 2007. Paragraph 4 improves that prospect because it is designed to demonstrate that the effect of the transfer and of the Scheme is not to novate the individual policies but to continue them. It provides as follows: “Notwithstanding the transfer of the LPTR policies from the transferor to the transferee pursuant to the Scheme for the purposes of paragraph 5 of Schedule 18 to the Finance Act: (a) each LPTR policy shall continue to be treated as having been issued on the date on which it was originally issued by the transferor and where relevant pursuant to the same written proposal; and (b) rights under each LPTR policy shall continue to be treated as having become held for the purposes of the Scottish Equitable Personal Pension Scheme on the date on which rights under such LPTR policy were originally issued by the transferor and became so held such that each LPTR policy shall continue to constitute a protected policy as defined in the Scheme immediately after the effective date.” 19. I am satisfied that the effect of the transfer will not be to novate the LPTR policies but to continue them. Section 112(3) expressly provides that an order under subsection (1) takes effect by transferring the property and liabilities to the transferee and vesting them in the transferee as a result of the order. In my judgment, it is clear from that subsection that the intention of the legislature was not to novate each policy by discharging the existing policy and creating another but, indeed, to transfer existing rights and liabilities from the transferor to the transferee. 20. Mr Moore was unable to show me any direct authority which supports this statutory construction. However, he drew my attention to two authorities in which the Court adopted similar reasoning and a similar conclusion in analogous circumstances: see Re Reassure Ltd [2020] EWHC 2299 (Ch) at [194]. See also Re Royal London Mutual Insurance Society Ltd [2018] EWHC 2215 (Ch) where Zacaroli J considered the effect of a transfer in different circumstances: see [33] to [52]. I am satisfied that they provide support for the conclusion which I have reached and that I can properly make an order in the form of paragraph 4. For those reasons, therefore, I will sanction the Scheme and I will make an order in the form of the draft order, subject to the additional amendments which Mr Moore identified in his oral submissions. – – – – – – – – – – – (This judgment has been approved by the Judge.) Digital Transcription by Marten Walsh Cherer Ltd 2nd Floor, Quality House, 6-9 Quality Court, Chancery Lane, London WC2A 1HP Telephone No: 020 7067 2900 DX: 410 LDE Email: [email protected] Web: http://www.martenwalshcherer.com