In the 2015 budget, the then UK Chancellor, George Osborne, announced that the UK Government proposed to develop a framework for insurance linked securities (ILS) that would enable London to be the largest global hub for such transactions. Since that budget, elections have been won and lost, the UK has committed to Brexit and there is uncertainty about the future direction of the London financial markets. Throughout these changes, however, the Government has remained committed to the development in the UK of an attractive framework for ILS transactions.
That process neared its conclusion with the publication on 20 July 2017 by the Government of “Regulations for implementing a new regulatory and tax framework for insurance linked securities”. These regulations will be put before Parliament after the summer recess and are expected to come into force in the early autumn of 2017.
The regulations follow two rounds of consultation which have seen significant changes to the Government’s original proposals. In particular, the regulations respond to market concerns by removing the requirement for pre-issue approval of individual risk transfer deals. Early drafts of the regulations had required pre-deal authorisation for individual risk transfer cells. That requirement is removed in the final document which requires instead that new cells must be notified to the Prudential Regulation Authority (PRA) within 5 working days of being set up. The Government says that it is satisfied that the clearly defined terms for authorisation of the overarching Insurance Special Purpose Vehicles (ISPVs) will ensure that transactions remain compliant with Solvency II. It remains the case, however, that authorisation of new ISPVs will take between 6 – 8 weeks.
Under the regulations, ILS structures will remain tax free and investors will be taxed on income on their home domicile. In its original proposals, the Government had indicated that this tax free status could be lost in the event of administrative failures in the management of the cell or ISPV. In response to consultation, however, the new regulations provide that tax free status will only be lost in the event of serious or deliberate inaccuracies in information provided or for repeated administrative failures.
The Government has said that its proposals will allow the UK to remain at the forefront of global reinsurance markets and that the new regime sets out a tailored and proportional approach to authorisation and supervision.
It remains to be seen if these new regulations can achieve those objectives but the Government’s constructive response to the consultation process provides reassurance that it continues to be focused on providing markets with a competitive ILS framework.