ILS regulations approved
A UK government cross-party parliamentary committee has approved the Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017, which will make up the UK ILS regulatory regime, but not without pertinent questions from those attending.
Questions were asked regarding the fact these regulations have been prioritised by the UK government at a time when it is facing an exit from the European Union, which many feel may become a so-called hard Brexit. Ministers attending the committee meeting asked whether the enactment of the UK ILS regulations would actually provide significant benefit to the local insurance and reinsurance market, at a time when it faces issues of passporting and continuity of access to trade in Europe.
Other questions were asked regarding the tax treatment of these ILS vehicles and whether they could be used to aid in avoiding tax. Committee members were told that UK ILS vehicles will have to be approved before use by both the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) which means that the rules cannot be used for the wrong reasons.
Also the fact ILS structures are fully collateralized, sufficiently to always pay their insurance or reinsurance obligations, means that the structures have to be used for their stated purpose only.
City minister Steve Barclay explained that despite the importance of London as a reinsurance hub, the rapid growth of ILS has happened elsewhere, largely offshore. So the process of developing a “fit for purpose” regulatory framework has been undertaken, with the goal of ensuring London can play a role as the ILS market grows, Barclay explained.
He said that the rules have been developed to ensure protection of both issuer and investors, while also ensuring transactions are ring-fenced within protected cell vehicles to ensure security and segregation of risks or assets from one transaction to another.
Certain committee members are skeptical that the ILS regulations will make the difference to the London reinsurance market’s success and importantly the countries tax take, at a time when it faces losing more business if a hard Brexit becomes a reality.
But ILS is not linked to Brexit and the development of the ILS market and issuance of insurance-linked securities (ILS) will continue apace, no matter what happens regarding the UK’s exit from the EU. So the committee appeared to see the benefits that could be gained by having the ILS regulations enacted as law.
“This is the kind of global business that the UK should be dealing in,” Barclay explained, before going on to explain the safeguards that are naturally in place in ILS transactions and the regulatory oversight that will prevent the PCC vehicles use for tax avoidance.
