HM Treasury has published a wide ranging consultation on the introduction of an Insurance Linked Securities (ILS) framework following the discussions between the ILS Taskforce (a group of industry practitioners with expertise in reinsurance and specialist risk transfer business), HM Treasury, HMRC, the PRA and the FCA. The consultation is not limited to tax and includes both regulatory and corporate law considerations. It will be of particular interest to groups with existing ILS platforms in non-UK jurisdictions, e.g. Bermuda, and those looking to set up platforms. The consultation focuses on collateralised reinsurance and CAT bonds with a recognition that the approach may need to be further tailored for other forms of ILS.
There are number of interesting elements to the consultation:
- Investors in ILS investments: the proposals are to restrict ILS investments to sophisticated investors.
- Need for a UK secondary trading platform: the consultation invites comments on whether such a platform is required and whether it would be possible to have one that did not result in the application of the requirements of the Prospectus Directive.
- Multi-arrangement insurance special purpose vehicles (mISPVs): the potential for a two-stage authorisation for mISPV arrangements.
- The use of Protected Cell Companies (PCCs): a novel feature of the framework is for the provision for the introduction of PCCs into UK corporate law solely for the use with ILS business. It is clear that significant thought has gone into designing an effective protected cell regime for ILS business and HM Treasury have requested industry comments on whether there are features which are lacking in protected cell regimes used elsewhere and that could be included in the UK regime.
- Use of the Insurance Securitisation Companies Regulations 2007: although now effective obsolete, HM Treasury believe that it may be possible to update these to deal with the taxation of debt-issuing ISPVs (e.g. catastrophe bonds) but note it would be challenging. It also acknowledges that there was limited uptake by debt-issuing ISPVs following the introduction of the regulations in 2007 and has requested comments as to whether this would be competitive when compared to other jurisdictions.
- Exemption based approach for equity-backed ISPVs: HM Treasury is proposing to exempt qualifying ISPVs and effectively transfer the tax liability on the income to investors by classifying the distributions they receive from the ISPV as taxable income, regardless of their individual circumstances. In order to deliver parity in the treatment of distributions to UK and foreign investors, HM Treasury are minded to introduce a withholding tax on distributions to foreign investors (similar to the REITs regime). However, there is a concern whether this may undermine the competitive value of the tax exemption approach. There is also a thought as to whether it may simpler to apply this framework to debt-backed ISPVs as well as equity-backed ISPVs (and so have a single regime rather than two).
Comments are due by 29 April 2016.
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