29 November 2017
Reporter: Becky Butcher

UK’s ILS legislation approved

A UK government cross-party committee has approved the UK’s Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017, which make up the UK’s insurance linked-securities (ILS) legislation.

In the meeting of the Fifth Delegated Legislation Committee, Jonathan Reynolds Labour Co-operative MP and shadow economic secretary to the treasury, said: “We should always bear in mind the potential risks around securities markets, with the ILS being particularly affected during the global financial crisis.”

Reynolds suggested that this package of measures was announced in the 2015 budget, a long time ago in political terms.

He commented: “Now we face an entirely different landscape due to our exit from the EU. I do find it odd that the government is taking this approach to ensure the London market is equipped to compete globally, while ignoring the elephant in the room, which is that a no deal Brexit would cut off the industry at it’s knees.”

However, Stephen Barclay Conservative MP and economic secretary to the Treasury, replied to the shadow minister stating: “It is Brexit that reinforces the benefit of increasing the UK’s influence over what is already an established part of the market … one that is currently off shore. Bringing it within the UK will give UK regulators more influence over this market.”

Over the past two years, the UK Treasury has worked with the Prudential Regulation Authority, the Financial Conduct Authority and the London Market Group’s ILS taskforce to develop the UK’s ILS regulations.

The regulations allow for insurance and reinsurance firms to transfer risk to the capital markets, meaning that risk can be managed more effectively for businesses and consumers.

According to William Hogarth, legal director at Clyde & Co, this is a “great step forward” for the UK.

Hogarth suggested that London is in a “strong position” when it comes to attracting ILS business as it is home to some of the “world’s best and brightest insurance talent”.

Following the government’s initial consultation on ILS, the second consultation, published in November last year, proposed to create a protected cell company (PCC) regime for multi-arrangement insurance special purpose vehicles (ISPVs).

Hogarth suggested that the PCC model for ILS is attractive because it allows investors to “ring-fence risk; with each individual cell of a PCC effectively operating like a separate insurance vehicle”.

He commented: “Each cell is fully funded for the risk or portfolio of risks for which it is designed, but is isolated from other cells within the PCC, ensuring there is no cross-contamination.”

ILS has been gaining popularity over the last two decades and growth is set to continue, according to Hogarth.

He added: “The strength of London's reputation will serve as an advantage given recent disclosures around offshore tax havens, some of which have already become established ILS centres.”

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