FSA Consults On Introduction Of Insurance Special Purpose Vehicles

by Robin Pilgrim, LawAndTax-News.com, London

21 June 2006

The Financial Services Authority (FSA) on Tuesday launched a consultation on rules to introduce a new fit-for-purpose regime for Insurance Special Purpose Vehicles (ISPVs) to the UK.

The proposals form part of a wider consultation on the implementation of the EU Reinsurance Directive (RID).

ISPVs are special purpose reinsurance vehicles which must be fully funded, typically by issuing debt. If the ISPV has to pay out under its reinsurance obligations, the repayment rights of the debt holders are reduced accordingly. Currently an ISPV would be regulated on the same basis as a firm conducting traditional reinsurance business and would be subject to the full authorisation process for such a firm.

Under the RID, the FSA will introduce authorisation requirements that are proportionate to the lower risks resulting from the structure of ISPVs. These will remove unnecessary information requirements and place greater focus on self-certification than for a traditional insurer or reinsurer.

The FSA will largely supervise ISPVs through its supervision of the ceding insurer, which will ensure that an adequate level of consumer protection is maintained at all times. The introduction of an ISPV regime will allow insurers to manage their capital more efficiently.

Thomas Huertas, FSA Director for Wholesale Firms, explained that:

"The implementation of the Reinsurance Directive gives the FSA an opportunity to make the UK an easier place for insurers to do business in. Introducing ISPVs will give insurers and reinsurers access to more diverse sources of capital and enable them to manage their capital more efficiently."

"We can now also give greater investment flexibility to pure reinsurers, whilst life reinsurers will benefit from reduced capital requirements. These changes will provide an important contribution to our provision of the 'Regulatory Platform of Choice'."

The insurance industry has indicated that the two main factors determining the location of innovative vehicles such as ISPVs, are the regulatory and taxation regimes in a jurisdiction.

On 13 June 2006, HM Revenue and Customs (HMRC) proposed the implementation of a new taxation regime for Special Purpose Vehicles involved in the securitisation of financial assets, to take effect from 1 January 2007, and issued a set of draft regulations. As part of its proposals, HMRC is seeking industry views on whether ISPVs should also be brought within the scope of that regime.

The FSA consultation paper proposes a new rule to cover financial reinsurance and other innovative insurance transactions. This will require firms to assess the level of risk transfer arising from a transaction, including whether the associated documentation reflects the economic substance of the transaction. Firms would only be able to take account of the risk transferred by the transaction when calculating their minimum capital requirements.

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