Prudential Regulation Authority Rulebook

4.1

It is for the committee of management of a friendly society to decide whether to recommend an amalgamation or a transfer of engagements to the society’s members. This chapter provides some details of the procedures to be followed and the information to be provided to a friendly society’s members so that they are appropriately informed before they exercise their right to vote on the proposals.

4.2

[Deleted]

4.2A

Firms should first discuss with the PRA the procedural aspects for dealing with friendly society transfers and amalgamations. Friendly society transfers are governed by the Friendly Societies Act 1992. While there are parallels with the process for insurance business transfers under Part VII of FSMA, the PRA is the ‘appropriate authority’ under the Friendly Societies Act 1992 for confirming friendly society transfers from PRA authorised persons. The Friendly Societies Act 1992 governs transfers of engagements where the transferor is a friendly society and the transferee falls within the categories of person listed in section 86(1) of Friendly Societies Act 1992. The Friendly Societies Act 1992 does not govern insurance business transfers where the transferor is not a friendly society. Such transfers fall within Part VII of FSMA, including where the transferee is a friendly society.

4.2B

Under the Friendly Societies Act 1992, the PRA is required to consult with the FCA prior to confirming a transfer.

4.3

Friendly societies are encouraged to discuss a proposed transfer or amalgamation with the regulators at an early stage to help ensure that a workable timetable is developed. This is particularly important for an amalgamation where additional procedures are required such as that described in 4.9.

4.4

The regulators will want to be satisfied that after an amalgamation or a transfer the business will be prudently managed and continue to comply with all applicable requirements.

4.5

For a transfer to another friendly society, if the conditions of 87(1) and 87(2) of the Friendly Societies Act 1992 are met, a report is required from the appropriate actuary of the transferee to confirm that it will meet the necessary margin of solvency. Where the conditions of 87(1) and 87(3) are met, the PRA may require a report from the appropriate actuary of the transferee to confirm that it will have an excess of assets over liabilities.

4.6

For a transfer of long-term insurance business, the PRA may, under section 88 of the Friendly Societies Act 1992, require a report from an independent actuary on the terms of the proposed transfer and on their opinion of the likely effects of the transfer on long-term policyholder members of either the transferor or (if it is a friendly society) the transferee. In addition, the PRA may request that the independent actuary considers the likely effects on any other policyholders or members impacted by the transfer. The PRA will take into account the scale and complexity of the transfer in its decision whether to require such a report. A summary is included in the statement sent to members and the full report is required to be made available to anyone on payment of a reasonable fee. The general principles in 2.30–2.37 of Chapter 2 apply to the independent actuary’s report. 

4.6A

Where the reports detailed in paragraphs 4.5 and 4.6 are required, the PRA may request in certain instances that supplementary reports are produced, for example where there have been material financial or other developments subsequent to the members’ vote and prior to the confirmation hearing. In such instances, the PRA will consider the specific procedural implications of requesting a supplementary report on a case-by-case basis. For example, where the conclusions in the supplementary reports differ from those in the first reports the PRA notes this may necessitate further communications with affected members eligible to vote and/or additional advertising. Depending on the materiality of the conclusions reached, it may also lead to the requirement for a further member vote.

4.7

Under the Friendly Societies Act 1992 the PRA is required to confirm a proposed transfer of engagements. It will do so only where it is satisfied that the transfer is in the interests of the members of each friendly society participating in the transfer. The PRA will therefore ask that the participating societies’ actuaries confirm that the transfer is in the interests of the members.

4.8

Under the Friendly Societies Act 1992, members will normally have the opportunity to vote on a proposed transfer or amalgamation (save for the exceptions set out in 4.12 and 4.13). A friendly society has to ensure that, before casting their votes, its members are clearly and fully informed of the terms on which the amalgamation or transfer of engagements is to take place and that they have all the information needed to understand how their interests will be affected. If the society’s rules permit, delegates can vote except on an ‘affected members’ resolution’ under section 86. The PRA may not confirm an amalgamation or a transfer if it considers that information material to the members’ decision was not made available to all the members eligible to vote.

4.9

Amendments to a friendly society’s registered rules may be necessary to permit a transfer to it. The FCA will need to be consulted in the usual way about registration of the appropriate rules. Similarly for an amalgamation, each of the amalgamating societies has to approve the memorandum and rules of the new society and the requirements of Schedule 3 to the Friendly Societies Act 1992 have to be met. It will be necessary to allow adequate time for these processes.

4.10

For an amalgamation the successor society, and for a transfer the transferee, may need to apply for permission, or to vary its permission, under Part 4A of FSMA. The regulators will need sufficient time before a transfer is confirmed to consider whether any necessary permission or variation should be given.

4.11

It is likely that the information sent to members with voting rights will include a statement explaining the reasons for the amalgamation or transfer and the choice of partner. Although this is not a statutory statement and not subject to the PRA’s approval, the PRA’s views on the content of the statement will be a factor that it will take into account before considering whether to confirm the amalgamation or transfer. A friendly society will therefore find it helpful to consult the PRA about the content of such a statement.

4.12

The PRA has discretion under section 86(3)(b) of the Friendly Societies Act 1992 to allow a transferee society to resolve to undertake to fulfil the engagements of a transferor society by resolution of the committee of management, rather than by special resolution. Among the issues that the PRA would wish to be satisfied on before exercising this discretion, are that the transfer will be in the interests of the members of both societies and that the transfer will not mean a change of policy by the transferee society. The PRA is unlikely to exercise this discretion unless the transferee is significantly larger than the business to be transferred.

4.13

The PRA has discretion under section 89 of the Friendly Societies Act 1992 to modify some of the requirements for a transfer of engagements from a friendly society, on the application of a specified number of its members, if it is satisfied that it is expedient to do so in the interests of its members or potential members.

4.14

Schedule 15 to the Friendly Societies Act 1992 requires a statement to be sent to every member of a friendly society entitled to vote on a transfer or amalgamation. Among other matters this statement has to cover the financial position of the friendly society and every other participant in the transfer or amalgamation. The members should be provided with sufficient financial information about the respective financial positions of the participants to gain an understanding of the relative financial strengths and key features of the participants. The statement has to include a summary of any actuary’s report under section 88, though the PRA may direct that the summary is to be provided separately if inclusion appears impractical.

4.15

The financial information provided under 4.14 would normally contain comparative statements of balance sheets at the same date, and include main investments, reserves, regulatory capital requirements, capital coverage and funds or technical provisions, with details of the number of members of each participant as at the balance sheet date and the premium income of the relevant fund of each participant during the financial year to which the balance sheet relates. 4.16 to 4.17 below give further details of the financial information to be included.

4.16

If the information relates to a position some time in the past, the information should state that there has been no significant change or include a clear description of the changes. Differences in accounting policies and reporting requirements could lead to the loss of some comparability between participants. Such differences and their estimated financial effects (if any) should be explained.

4.17

The information should state whether any of the participants has any significant future capital commitments. The PRA will require it to state that the transfer of engagements or amalgamation will not conflict with any contractual commitment by a society, any subsidiary or any body jointly controlled by it and others.

4.18

[Deleted]

4.19

The PRA may require confirmation from the auditors of either friendly society involved in the transfer or amalgamation about the reasonableness of any part of the information in the statement. For instance such confirmation would normally be required if the financial information relates to a date more than six months previously.

4.20

The statement is required to include particulars of:

1. (1) any interest of the members of the committee of management in the amalgamation or transfer; and
2. (2) any compensation or other consideration proposed to be paid to committee members or other officers of the society and to the officers of every other society or person participating in the amalgamation or transfer.

Under section 92 of the Friendly Societies Act 1992, any compensation must be approved by a special resolution, separate from any resolution approving other terms of the amalgamation or transfer. This enables members to vote on this as a separate issue.

4.21

Under schedule 15 to the Friendly Societies Act 1992, the PRA may require the statement to include any other matter. Under this provision, inclusion of the terms on which the amalgamation or the transfer of engagements is to be made will usually be required.

4.22

The statement should be approved by the PRA, after consulting with the FCA, prior to being shared with members, and the statement should be clearly separate from other information sent to members. If it is not in a self-contained document, the approved element should appear in a separate section. The PRA must approve the statement, but the society is responsible for the accuracy of the financial data; therefore, this clarification should be clearly set out in the statement.

4.22A

The Friendly Societies Act 1992 prescribes that the statement should be provided to members a minimum of 14 days prior to the vote (or such longer period as required by the rules of the societies that have members who are eligible to vote on the transfer). In order to ensure members have sufficient time to consider the information, the PRA would expect this period to be longer in some circumstances, for example where a society has a very large membership or where a transfer is particularly complex.

4.23

[Deleted]

4.24

Under the Friendly Societies Act 1992:

1. (1) when the members of a transferor society have approved the transfer of its engagements by passing a special resolution and the transferee has approved the transfer (by passing a resolution where the transferee is a friendly society); or
2. (2) when two or more societies have approved a proposed amalgamation by passing a special resolution;

it, or they jointly, must then obtain confirmation by the PRA of the transfer. Notice of the application will need to be published in one or more of the London, Edinburgh or Belfast Gazettes and other newspapers as directed by the PRA. This notice should include information as to how members can make representations. If the PRA confirms a transfer, then the FCA will register the society’s instrument of transfer after receiving an application on the appropriate form by the transferor society and the transferee. If the PRA confirms an amalgamation, the FCA will register the successor society. For transfers, all the property, rights and liabilities pass on the transfer date specified by the PRA on the registration certificate provided by the FCA. For amalgamations, all the property, rights, and liabilities pass on the date specified on the certificate of incorporation provided by the FCA.

4.25

[Deleted]

4.26

The criteria that the PRA must use in determining whether to confirm a proposed amalgamation or transfer is set out in Schedule 15 to the Friendly Societies Act 1992. These criteria include that:

1. (1) confirmation must not be given if the PRA considers that:
   1. (a) there is a substantial risk that the successor society or transferee will be lawfully unable to carry out the engagements to be transferred to it. For the purposes of this condition, the PRA may have regard to the requirements of any country outside of the UK which appear to be relevant;
   2. (b) information material to the members’ decision about the amalgamation or transfer was not made available to all the members eligible to vote;
   3. (c) the vote on any resolution approving the amalgamation or transfer does not represent the views of the members eligible to vote; or
   4. (d) some relevant requirement of the Friendly Societies Act 1992 or the rules of any of the participating societies was not fulfilled (but it can modify some requirements and direct that certain failures may be disregarded, see 4.13 above and 4.28 below);
2. (2) the PRA must be satisfied that:
   1. (a) the transferee or successor society will have any permissions necessary under Part 4A of FSMA;
   2. (b) for a transfer, it is in the interests of the members of each friendly society participating in it; and
   3. (c) [Deleted]
   4. (d) for transfers which fall within scope of paragraph 15 of Schedule 15 to the FS Act, that every policy included in the transfer evidences a contract which was entered into before the date of the application; and
3. (3) for a transfer, the transferee possesses the necessary margin of solvency after taking the proposed transfer into account or, where it is not required to maintain a necessary margin of solvency, possesses an excess of assets over liabilities (If the transferee is a Swiss general insurance company, then confirmation will be needed from FINMA that it meets Switzerland’s solvency margin requirements).

4.26A

The PRA would expect that an application is accompanied by an explanation of how the various confirmation criteria and relevant requirements under the Friendly Societies Act 1992 have been met.

4.27

If authorisation or a Part 4A permission is needed, the PRA will need to consider the application for authorisation or permission in the usual way. If the authorisation or permission is refused, confirmation cannot be given even if all the other criteria are met.

4.28

The PRA may (as an alternative to refusing confirmation) direct the society to remedy certain procedural defects in a proposed transfer or amalgamation, and after they have been remedied confirm the application. If it appears to the PRA that failure to meet a ‘relevant requirement’ of the Friendly Societies Act 1992 or the rules of the friendly society is not material to the members’ decision, then it may direct that this failure is to be disregarded.

4.29

Any interested party has the right to make representations to the PRA about an application for confirmation of a transfer or amalgamation. This includes any person (whether a member of the friendly society or not) who claims that they would be adversely affected by the amalgamation or transfer. The person making the representations should state clearly why they claim to be an interested party and the ground to which the representations are directed.

4.30

Written representations, or written notice of a person’s intention to make oral representations, or both, are required to reach the PRA by the date published in the relevant Gazettes and other newspapers. Those giving notice of intent to make oral representations are advised to state the nature and general grounds of the oral representations they intend to make. Persons who make written representations but subsequently decide also to make oral representations are required, nevertheless, to give notice of that intention, in writing, to the PRA by the same date.

4.31

The PRA will send copies of all written representations to the society, and will give them an opportunity to comment on the representations. The PRA also expects the society to respond directly in writing in advance of the hearing to those that have made representations. The PRA may consider the written representations and the society’s response to them, before the date set for any pre-confirmation hearing to hear oral representations. A synopsis of the written representations (probably in the form of a summary of each of the points made and the numbers of persons making each point) and the society’s responses will be made available to those participating in any pre-confirmation hearing. This is intended to inform those making oral representations of the points already being considered by the PRA. In addition to written representations sent to the PRA, it is likely that members will also raise concerns with the society directly. The regulators would expect the society to share summaries of these member communications and its assessment of the issues raised.

4.32

The regulators expect that any documents referred to in the society’s comments will be made available by the society for inspection at its registered office, its website and, if reasonably possible, at the venue of the hearing on the date of the hearing. However if a society applies to put documents which it considers to be sensitive to the regulator(s) in confidence, the regulators will balance any disadvantage this might cause interested parties in making representations against the commercial damage that publication of the documents might cause, and may permit the documents or sensitive parts of them not to be available for inspection.

4.33

Interested parties may be represented and may make collective representations. Such arrangements should be notified to the PRA in advance to enable it to make appropriate arrangements.

4.34

The hearing will be at a time and place that will be notified to the participants and will be conducted by the PRA’s representatives. The hearing may last longer than one day and may be adjourned. The PRA will try to tell participants when they may expect to make their representations and when the society may be expected to respond.

4.35

The PRA expects that any pre-confirmation hearings will be held in public though this is not required. At the start, members of the general public and the press will be asked to wait outside while participants are asked if any of them has good reason to object to the admission of the general public or the press. Unless an objection by a participant is upheld by the PRA’s representatives, the press and the general public will then be admitted, within the limits of the space available. The PRA’s representatives may decide that parts of the hearing will be in private if that appears to them to be necessary.

4.36

The procedure will be informal. All participants will be expected to speak concisely and avoid repetition. The PRA will, as far as practicable, help those who are not professionally represented. Those taking the hearing may question the participants. The sequence of events will normally be:

1. (1) any preliminary matters (such as the admission of the public or other procedural questions) will be dealt with;
2. (2) the chair of the hearing will introduce the proceedings;
3. (3) the society representatives will be invited to speak on the application, including a description of the events at the meeting at which the resolution to amalgamate or transfer was put to the members, a statement of the voting on the resolution, and any other matters that they wish to introduce at that stage;
4. (4) the other participants will be invited to speak to their representations. The PRA expects to call them in order of a list arranged, as far as possible, by subject matter;
5. (5) the society representatives will be invited to reply to, or comment on, the points made by the other participants; and
6. (6) the other participants will be invited to comment on the society’s replies.

4.37

The procedure in 4.36 above may be varied according to the circumstances at the hearing, and is intended only as a guide. The hearing may be adjourned if the PRA’s representatives consider it necessary in order to enable facts to be checked or additional information to be obtained.

4.38

The PRA will not decide whether to confirm the transfer or amalgamation at the hearing. A copy of its written decision, including its findings on the points made in representations, will be sent to the society and to those making representations. It will also be available to any other person on request and may be published.