Prudential Regulation Authority Rulebook

4

A write-down order may be made by the court under section 377A of FSMA upon application by:

1. (a) HM Treasury (HMT);
2. (b) the PRA;
3. (c) the insurer;
4. (d) a shareholder of the insurer; or
5. (e) a policyholder or other creditor (including a contingent or prospective creditor) of the insurer.¹

5

Except where the applicant is HMT or the PRA, the applicant must obtain the consent of the PRA before making an application to court for a write-down order.²

6

The PRA’s consent must be:

1. (a) in writing; and
2. (b) filed with the court with the relevant application.³

7

The PRA is also required to consult the Financial Conduct Authority (FCA) before giving or refusing such consent.⁴

8

In deciding whether to consent to the making of a write-down application, the PRA will consider all relevant factors, including those set out below, in the context of its statutory objectives. While the PRA’s consent is required for most applications to proceed, the giving of such consent does not mean that a write-down order will ultimately be made. It is for the court to decide whether, and on what terms, to make a write-down order by reference to the test in section 377A(2) of FSMA.

9

The PRA expects intending applicants to prepare a write-down plan (usually in conjunction with a nominee write-down manager). The write-down plan should set out the proposed terms of the write-down order. The PRA will consider the position of the firm and the write-down plan from the perspective of its statutory objectives. In particular, the PRA will consider the impact on policyholders, having regard to:

1. (a) the scale of the write-down compared to a potential insolvency counterfactual;
2. (b) the extent to which policyholders could be eligible for protection under the Financial Services Compensation Scheme (FSCS);
3. (c) the potential impact of the write-down on the FSCS compared to a potential insolvency counterfactual;
4. (d) the impact of not allowing a write-down on continuity and availability of cover;
5. (e) whether the firm has sufficiently assessed the adequacy, availability, and timeliness of other approaches to securing a solvent run-off or orderly exit, before seeking a write-down order;
6. (f) the location of the firm’s head office and operations and the jurisdiction of its insured persons and risks, and the associated risk of the write-down order not being enforceable or other insolvency or restructuring proceedings being commenced; and
7. (g) other relevant factors, including tax implications for policyholders, the firm, and other affected parties.

10

Given the impact of a write-down order on policyholders, the FSCS and other affected persons, and ultimately the safety and soundness of PRA-authorised persons, the PRA will also consider:

1. (a) the likelihood and timing of a future write-up (which is a full or partial reversal of a write-down order),⁵ with interest;⁶ and
2. (b) whether the firm is in a position, in good time before the coming into effect of the write-down order, to agree and execute any documents and processes needed to give effect to the arrangements contemplated by Chapter 5A of the Policyholder Protection Part of the PRA Rulebook.

11

The PRA will also consult the FCA, as required under section 377C(5)(b) of FSMA. While the PRA will liaise directly with the FCA for this purpose, firms should discuss their proposed application for a write-down order with the FCA.

12

The PRA anticipates that write-down plans will broadly respect the creditor hierarchy in order to ‘lead to a better outcome for the insurer’s policyholders and other creditors (taken as a whole) than not making the order.’⁷ The PRA also recognises that while liabilities secured by floating charges are not excluded liabilities,⁸ and may therefore be written-down, this is intended to ‘avoid creating an inappropriate and unintended priority for inward reinsurance creditors, who are often granted a floating charge but contractually subordinated to rank alongside direct policyholders (who have a statutory priority)’.⁹ Accordingly, liabilities secured by floating charges which are not subordinated in this way would generally be expected to be written down only after lower-ranking liabilities, in accordance with the creditor hierarchy.