Fairness of schemes of arrangement questioned
The dusty arguments over the UK’s ability to wind up solvent (re)insurance companies through a process called schemes of arrangement were given a fresh airing last week at the Mealey’s Global Reinsurance Forum in Bermuda.
In an entertaining sparring session, London-based lawyers Roger Enock and Nick Atkins – of Covington & Burling LLP and Lovells respectively – locked horns over the controversial legal mechanism.
Schemes are a court-approved mechanism to wind-up (re)insurers, settling all outstanding and incurred but not reported (IBNR) claims and then distributing any remaining funds to shareholders. Although the UK industry welcomes schemes as another tool to manage legacy business, policyholder representatives – especially those in the US – remain sceptical.
Enock stood for the prosecution arguing that schemes were unfair because they were being used to “compel the minority” who would prefer their (re)insurer to remain in existence until their claim becomes valid.
He also questioned just how robust the independent reviews are of proposed schemes and called on the UK regulatory authority, the Financial Services Authority, to scrutinise them in greater detail.
The main purpose, argued Enock, is to “release reserves to shareholders which would otherwise go to policyholders”.
But in a lively exchange Nick Atkins – a partner with Lovells LLP – described Enock’s arguments as “complete nonsense” and added that schemes are “subject to very robust investigation by the judge”.
“There is fairness and there are safeguards,” he said.
He was supported by Mike Walker, the head of KPMG’s Restructuring Insurance Solutions Practice, who noted that there is now “greater transparency” in areas such as process and documentation following “push back” from the courts.
The schemes juggernaut was temporarily halted in 2005 following the notorious BAIC decision where the court refused to sanction the scheme following objections from policyholders that their views should be treated differently.
Atkins also added that “much more safeguards have been built” including more consultation time, extended time periods and improved documentation.
In all, around one hundred schemes have been approved by the UK courts.
Naturally, the disagreements between the two lawyers extended into Part VII transfers, an increasingly popular tool for statutory novations of liabilities into new vehicles.
Speaking in the wake of landmark 2007 transactions such as Sompo Japan and, more recently, Deutsche Ruck – which both involved overseas companies taking advantage of the legislation because a minority of their business was UK related – Enock asked rhetorically: “Why are all these companies coming to London, maybe it’s the weather?”
Enock continued by questioning whether the advisers of these transfers are undertaking the transfers because they want to ultimately benefit from the UK’s approach to schemes.
“If the ultimate plan is to do a scheme, then it should be outlined at the beginning,” he argued.
Part VII refers to the section in the Financial Services Markets Act 2000 relating to novations of business.