The Leeds Reforms and the Insurance sector

The Growth and Competitiveness Strategy

Central to the Leeds Reforms is the publication of the Government’s Financial Services Growth and Competitiveness Strategy. As was the case with the previous Government, the current Government considers the financial services sector to be a key part of plans for economic growth. The reforms announced on 15 July are, therefore, predominantly aimed at encouraging that growth by improving the regulatory environment for financial services firms. Reducing the regulatory burden on firms and increasing efficiencies is a central message – this includes a proposed streamlining of the SM&CR regime and the introduction of shorter deadlines for determining regulatory applications. Although there is no suggestion that additional resource will be provided to the regulators to meet the new targets, the PRA and FCA have each published letters to HM Treasury confirming how they will work to achieve the new deadlines and “stretch targets”.

The overall sense from the strategy is that (with the possible exception of the proposed review of the ring-fencing rules for banks) the changes proposed are not ground-breaking. Some of the strategy document refers to initiatives which are already in train – changes to conduct requirements for commercial insurance business, for example, which are in themselves unlikely to cause any seismic shifts and which we discuss in our earlier briefing. Perhaps as important as what is in the strategy and accompanying documents is what has been left out. Earlier expectations that the annual limit on cash ISAs would be reduced have not been met, for example, which will have disappointed investment banks and asset managers but pleased building societies. There was also no mention in the Chancellor’s speech of any potential use of the backstop power being taken in the Pension Schemes Bill to set asset allocation targets for DC schemes, which remains an area of concern in parts of the industry.

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The Risk Transformation Regulations and PCCs

The ongoing PRA consultation

We discussed in our January 2025 Outlook the PRA’s November 2024 consultation on proposed changes to the UK ISPV regime. A central plank of that consultation was the proposal to create an accelerated pathway for approval of the setting up of certain UK ISPVs, allowing new vehicles to be established within 10 working days rather than the current 4 to 6 weeks. The idea is that this will allow the UK to compete with other jurisdictions in the market for issuances of insurance-linked securities (“ILSs”).

The current regime for ILSs was established by the Risk Transformation Regulations 2017 (SI 2017/1212) (the “RTRs”). This included the introduction of protected cell companies (“PCCs”) into the UK corporate regime for the first time. So far, however, only a small number of PCCs have been established in the UK. The biggest take up has been through Lloyd’s of London’s London Bridge platform, which had deployed nearly $2 billion of capital through its two PCCs as at the end of 2024. The global market for ILSs is estimated to be around $110 billion.^[1]

The PRA policy statement on ISPVs is still awaited. Interestingly, though, the HM Treasury FS Sector Strategy on Cross-Cutting Reforms published on 15 July suggests that the 10 working day approval period will be a non-statutory target rather than a statutory deadline.

The HM Treasury consultation

As part of the Mansion House proposals, HM Treasury has published a consultation on changes to the RTRs, principally to allow PCCs to be used as captive insurers as well as for their current purpose of risk transformation. PCCs in other jurisdictions can be used for this purpose – in Guernsey, for example, this was how they were initially used when the Guernsey PCC regime was established in the 1990s. Allowing PCCs to be used as captive insurers has the potential to allow smaller businesses, which may not be in a position to create a full captive insurer, to insure risks with “captive cells”.

The principal changes to the RTRs will be:

• to allow transformer vehicles to assume risks from non-insurers (by amending Article 13A of the RTRs)
• to allow PCCs to be set up as insurance undertakings (by amending Articles 15 and 57 of the RTRs)

No further detail is included in the consultation as to how the existing regulatory regime for insurers should apply to PCCs – HM Treasury comments that “Differentiating where a PCC structure would or would not be appropriate would be for the regulators to assess, likely taking into account aspects such as the application of capital and liquidity requirements, governance and risk management rules and how the business would be wound up in the event of insolvency”. It may be that the proposed timescale for the PRA and FCA to consult on their rules for captive insurers partly reflects the need to construct a regime which encompasses PCCs.

HM Treasury also proposes:

• removing the existing requirement on the PRA to incorporate a limitation on the scope of the regulated activities of a transformer vehicle as part of the authorisation process (although the PRA would retain the power to introduce such limitations). The idea is that this would allow more scope for innovation rather than unnecessarily requiring vehicles to repeatedly apply for variations of approval (which otherwise could drive structures involving PCCs to a more flexible regime) 
• removing the restriction which limits the activities of a cell in a PCC to a single contractual arrangement from a single counterparty. In the consultation HM Treasury comments that it does “not see a reason to treat a cell of a protected cell company differently to other types of transformer vehicle”. The change would align with PRA proposed changes to its rules to allow stand-alone ISPVs (non-PCCs) to enter into more than one risk transformation transaction (subject to restrictions) - this could, for example, enable the tranching of risks into multiple layers or simplify the renewal process for repeat business. The Treasury proposal goes further than the PRA changes, however, in suggesting that the cell of a PCC should be able to assume risk from more than one undertaking. This would facilitate a corporate group insuring all of its risks into a particular cell but does cut across the ring-fencing of assets and liabilities in the PCC somewhat, so it will be interesting to see the detail of this change when the amending legislation is published

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The Financial Ombudsman Service

As mentioned above, a detailed briefing on the proposed changes to the Financial Ombudsman Service (“FOS”) regime prepared by our Financial Regulation team will follow.

The headline point, which will be of interest to insurers as well as other consumer facing financial services firms, is that the Government proposes changes to the “fair and reasonable” test under which the FOS currently operates. The changes will make it clear that where conduct complained of is in scope of the FCA rules then compliance with those rules, consistent with the FCA’s intention for what those rules should achieve, will mean that a firm has acted fairly and reasonably. The test will operate on the basis of the rules in place at the time of the alleged misconduct.

Industry will welcome the increased certainty this is likely to bring - avoiding the FOS acting, in the Government’s words, as a “quasi-regulator”.

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