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FSA toughens Part VII stance

The Financial Services Authority (FSA) has been taking an increasingly hard-line approach to the requirements on insurers to advertise and notify policyholders on Part VII applications of insurance business, according to law firm Hogan Lovells.

The FSA has appeared in court at least twice to take issue over applicants' handling of the requirements made on them under the Financial Services and Markets Act 2000.

"Recent statements by the High Court have emphasised the rareness with which waivers should be given in respect of notifying directly entire classes of policyholders," Hogan Lovells said in a note.

"These statements appear to have encouraged the FSA to resist a variety of waiver requests that were previously understood to be quite standard or uncontroversial."

Under the provisions of UK law, applicants are required to publicise the application for a transfer in at least two UK national newspapers and certain specified gazettes. Additionally, every policyholder must be sent notice.

While applicants are able to obtain waivers for some policyholders that are hard to reach, Hogan Lovells said that courts will generally be hesitant in giving a waiver order where notification of policyholders requires third party consent (such as a broker or delegated authority).

One of the FSA's interventions was made against the proposed transfer of some of Royal Bank of Scotland's insurance units to UK Insurance Ltd in Direct Line Insurance plc & others v FSA.

The transfer includes personal lines giants Churchill and Direct Line and would see around 10 million policies moved onto a single balance sheet.

RBS sought a wide variety of waivers for sending notices, especially where policies had been issued by third party partners or delegated underwriting authorities.

The bank had asked that the notification requirement on third party consent be made conditional after receiving various complaints from its partners about the burdens placed on them.

However, the FSA disagreed with this approach and said the applicant should bear the costs involved with the mailing.

In the pre-directions hearing Justice Floyd, the presiding judge in the UK High Court, refused to issue a waiver order on the basis of objections by third parties and asked that further discussions were held with the third parties before he would consider an order.

Subsequently, he granted the waiver in the hearing on the condition that RBS took steps to "advertise in a way which would be greater than the bare minimum required by the regulations to bring the transfer to the attention to policyholders".

This meant that adverts must be at least a quarter of a page in size and not buried in the legal classifieds section where it would be "unreasonable" to expect policyholders to find them.

Hogan Lovells said that where applicants were relying on an advertising campaign to justify a waiver order, the courts should be supplied with details of "comprehensively planned" advertising strategies.

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