Neutral Citation Number: [2012] EWHC 632 (Ch)
Case No: No. 2081 of 2012
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 16/03/2012

Before :

MR JUSTICE MORGAN
- - - - - - - - - - - - - - - - - - - - -
Between :

	In the matter of Combined Insurance Company of America		
	
- and -		
	
In the matter of ACE European Group Limited

-and-

In the Matter of ACE Europe Life Limited

-and- 

In the matter of Part VII of the Financial Services and Markets Act 2000		

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Mr Andrew Thornton (instructed by Norton Rose LLP) for the Transferor and Transferee Companies
Mr Robert Purves (instructed by Financial Services Authority) for the Financial Services Authority

Hearing dates: 12th March 2012
- - - - - - - - - - - - - - - - - - - - -
Judgment

Mr Justice Morgan:

Introduction

1.	This is the joint application of Combined Insurance Company of America, Ace European Group Limited and Ace Europe Life Limited for directions in relation to a proposed transfer scheme pursuant to Part VII of the Financial Services and Markets Act 2000 (“FSMA 2000”). 

2.	Combined Insurance Company of America will be referred to as “CICA” or as “the Transferor”. The business of its UK branch will be referred to as “CICA UK”. Ace European Group Limited will be referred to as “AEGL”. Ace Europe Life Limited will be referred to as “AELL”. AEGL and AELL will be together referred to as the Transferees. The Transferor and the Transferees will be together referred to as “the Applicants”.

3.	The Transferor has agreed to transfer the whole of the general insurance business of CICA UK (together with the benefit of all associated reinsurance contracts) to AEGL.  The Transferor has agreed to transfer the whole of the long term insurance business of CICA UK (together with the benefit of all associated reinsurance contracts) to AELL. 

4.	Normally, an application for directions in relation to a proposed transfer scheme pursuant to FSMA 2000 is made to the Registrar of the Companies Court. However, in this case, there is an issue between the Applicants and the Financial Services Authority (“the FSA”) as to whether certain former policyholders of CICA UK ought to be individually notified of the proposed transfer scheme. The Applicants and the FSA have therefore agreed that this application for directions should be listed for hearing by a Judge for a ruling on that issue before the implementation of whatever process of notification is required. 

5.	Mr Thornton appeared on behalf of the Applicants and Mr Purves appeared on behalf of the FSA.

Matters which are not in dispute

6.	Section 108 of FSMA 2000 authorises the making of regulations imposing requirements on applicants for an order under FSMA 2000 section 107. The relevant regulations are The Financial Services and Markets Act 2000 (Control of Business Transfers) (Requirements on Applicants) Regulations 2001. Regulation 3 imposes certain requirements as to notification of the application. Regulation 3(2)(a) requires the publication of a notice, that the application has been made, in the London, Edinburgh and Belfast Gazettes, in two national newspapers in the United Kingdom and in some circumstances in certain newspapers in EEA states. Regulation 3(2)(b) requires a notice, stating that the application has been made, to be sent to every policyholder of the parties. Regulation 3(2)(c) requires such a notice to be sent to certain reinsurers. By Regulation 3(4), a copy of the scheme report (required by FSMA 2000, section 109) and a statement setting out the terms of the scheme and containing a summary of the report must be given free of charge to any person who requests them. By Regulation 4(2), the court may waive some of the requirements of Regulation 3(2) in such circumstances and subject to such conditions as the court considers appropriate.

7.	The directions sought by the Applicants involve full compliance with the requirements of the Regulations in relation to press advertising in the United Kingdom and notification to outwards reinsurers. The directions sought by the Applicants involve relaxations of the Regulations in relation to press advertising in the EEA, notification to policyholders remaining in CICA, notification to policyholders transferring from CICA UK, notification to AEGL policyholders and notification to AELL policyholders. The Applicants have explained to the court their reasons for seeking these relaxations. The FSA has considered those explanations and all relevant matters and does not oppose the application for relaxations of the Regulations. I am satisfied that these relaxations of the requirements of the Regulations are appropriate. As these matters do not involve any matter of principle, it is not necessary to explain them more fully. However, in so far as it throws light upon the issue which remains to be decided, I will refer to one matter where the FSA accepts that the requirements of the Regulations can properly be relaxed. This relates to the requirement in Regulation 3(2)(b) that notice of the application be given to every policyholder of CICA. In view of the number of policyholders in CICA, whose policies are not to be transferred under the proposed scheme, the cost of notifying every policyholder in CICA rather than only the policyholders in CICA UK, the lack of impact on the policyholders who will remain in CICA and the Applicants’ proposals as to notices to be placed in newspapers, it is accepted by the FSA, and by me, that the costs of notification being given to every policyholder in CICA significantly outweigh any possible benefit of such notification to the policyholders remaining in CICA. It was also agreed that I could take into account the draft scheme report when making an assessment as to any possible adverse impact of the scheme on the policyholders in CICA.

The issue

8.	The FSA has invited the Applicants to agree to give notice, stating that the application has been made, not only to policyholders of CICA UK but also to certain former policyholders of CICA UK. The former policyholders in question are those who might be affected by the outcome of a Past Business Review (“PBR”), to which I will refer in more detail below. All references in this judgment to former policyholders are to this class of former policyholders only. The Applicants have not been prepared to agree to do so.

9.	On this application for directions, the FSA has asked the court to direct the Applicants to give notice, stating that the application has been made, to the former policyholders of CICA UK. The Applicants have submitted that the court should not give that direction. The issue for the court therefore is whether to give that direction to the Applicants.

The background

10.	I have been assisted by a detailed report prepared by the FSA which sets out important background information which I need to consider before resolving the issue as to the directions to be given to the Applicants.

11.	From 1 April 2008 to 26 October 2010 (“the Relevant Period”), CICA UK sold accident and sickness insurance products to retail customers. Sales of these products comprised the majority of new sales made by CICA UK throughout the Relevant Period. These were the only insurance products sold by CICA UK from 3 September 2010. 

12.	CICA UK sold these products via self-employed agents, who made sales on an advised basis.  CICA UK’s target customers were self-employed individuals, small business owners and manual workers.  CICA UK defined its target market by reference to a sole trader whose prolonged absence from his business through sickness or accident could jeopardise the performance or survival of the business. 

13.	CICA UK assessed its own customer base as not being financially sophisticated and as unlikely to have considered purchasing accident and sickness insurance before. 

14.	The products were relatively low cost; the average premium per policy per year sold in 2010 was £216.  However, many customers held multiple policies with CICA UK so their total premiums could be substantially higher.  The selling of additional policies to existing customers was a key aspect of CICA UK’s business model. 

15.	In respect of the sale of these products during the Relevant Period, CICA UK had 542,133 policyholders, sold 238,993 new policies and received £47 million in premium income.  CICA UK also received and paid out claims under these policies during the Relevant Period and continues to do so. 

16.	On 20 August 2010 (and in response, inter-alia, to concerns expressed by the Irish Regulator and concerns arising from the FSA's supervision of CICA UK), the FSA issued CICA UK with a requirement notice under FSMA 2000, section 166.  The notice required CICA UK to appoint a skilled person to review the adequacy and effectiveness of CICA UK’s governance and controls framework and to make appropriate recommendations to ensure CICA UK’s regulatory compliance and the fair treatment of customers. 

17.	In the light of the FSA’s concerns, CICA UK voluntarily applied on 6 September 2010 to vary its permission under FSMA 2000 by adding a number of requirements to its permission. These requirements included the following: CICA UK was required to cease recruitment of all new sales representatives until a third party was in place to oversee recruitment; CICA UK was required to allow a third party to review all complaints made against sales representatives and to follow the third party’s recommendation as to the appropriate disciplinary action to be taken; and all CICA UK’s new sales would be checked and confirmed as compliant by a third party (distinct from the skilled person appointed under FSMA 2000, section 166). 

18.	In the light of the initial data produced by the third party reviewing CICA UK’s new sales, CICA UK applied on 26 October 2010 for a further voluntary variation of its permission under FSMA 2000, to include a requirement that it would close to new business, save for the administration of in-force policies and the renewal or reinstatement of certain policies.  CICA UK remains closed to new business.

19.	On 16 December 2011, and following the conclusion of an enforcement investigation and subsequent enforcement proceedings, the FSA published a final notice recording the FSA's decision to impose a financial penalty of £4 million on CICA UK for breaches of the FSA's Principles for Business. The final notice also recorded that in light of CICA UK’s agreement to settle the enforcement proceedings at an early stage, the FSA reduced the financial penalty to £2.8 million. 

20.	The FSA's Principles for Business are high-level regulatory rules to which all FSA authorised firms are subject.  The FSA's enforcement investigation found that CICA UK had breached: 

Principle 3, in that CICA UK failed to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.  In particular, CICA UK failed to establish effective controls and governance arrangements to identify and manage the risk that its customers would be treated unfairly and that it would breach its regulatory obligations; and 

Principle 6, in that CICA UK failed to pay due regard to the interests of its customers and treat them fairly.  In particular, CICA UK failed fully to embed a culture which recognised the importance of treating customers fairly, evidenced by CICA UK’s systemic TCF failings across much of its business. This resulted in the risk of customers being treated unfairly and being advised to purchase regulated products which were not suitable for their demands and needs. CICA UK failed to put in place adequate controls and governance arrangements to mitigate this risk. 

21.	The FSA concluded that CICA UK had breached these Principles for Business by reason of systemic failings across much of CICA UK’s business, including in respect of the following: 
Recruitment, training and competency: CICA UK did not put in place adequate systems and controls to ensure that its sales agents had the necessary skills and knowledge to provide its customers with suitable advice and as a consequence put customers at risk of being treated unfairly. 
Sales processes: CICA UK failed to put in place adequate systems and controls to ensure that its customers were provided with suitable advice.
Remuneration and reward framework: CICA UK paid its sales agents on a commission only basis.  Its reward framework focused on sales volumes with insufficient consideration of quality.  CICA UK failed to put in place effective controls to manage the risk of poor customer outcomes. 
Claims handling: CICA UK failed to put in place proper systems and controls to monitor its claim handling process to ensure that customers’ claims were handled fairly. 
Complaints handling: Some aspects of CICA UK’s documented complaints handling procedures were inadequate. Further, CICA UK did not make effective use of management information and root cause analysis to improve customer outcomes. 
Controls and governance: Throughout its business CICA UK failed to put in place proper and effective governance arrangements and controls to identify and manage the risk that its customers would be treated unfairly, and failed to take effective action when issues arose.  There was insufficient discussion by senior management of the root causes of issues, and CICA UK failed to make effective use of customer feedback to identify issues and make improvements to its business and systems. 

22.	The FSA is concerned that, as a consequence of these widespread failings, CICA UK’s customers may have suffered financial detriment. Such detriment may arise, for example, as a result of mis-selling or as a result of a failure properly to deal with customer complaints. 

23.	CICA UK agreed to conduct, through an independent third party, a PBR consisting of a review of the CICA UK business from 6 January 2008 to the end of the “pilot” period of the PBR. The purpose of the PBR is to identify any customer detriment arising from the effecting or carrying out of the relevant contracts of insurance and to calculate and provide appropriate redress to any customers who suffered loss as a result of CICA UK’s failings. 

24.	CICA UK estimates, and the FSA has no reason to dispute, that the PBR will be relevant to (in addition to many of CICA UK's current policyholders), approximately 292,930 former policyholders of CICA UK.  The scale of redress that may be required as a result of the PBR is presently unknown, but may be large.

25.	The PBR will be conducted in two phases. Even the first or “pilot” phase is unlikely to be completed before the time of the final hearing for the sanction of the scheme. It is therefore clear that the PBR as a whole will not be completed by the time the Court is asked to sanction the scheme. 

The submissions for the Applicants

26.	It is submitted that nothing in FSMA 2000 requires the Applicants to give notice of the application to the former policyholders of CICA UK.  Further, it is submitted that the Regulations made pursuant to section 108 of FSMA 2000 do not so require. Regulation 3(2)(b) refers to “policyholders”. Pursuant to FSMA 2000 section 424(2), “policyholder” is defined by Article 3 of the Financial Services and Markets Act 2000 (Meaning of “Policy” and “Policyholder”) Order 2001 in a way which does not extend to the former policyholders of CICA UK in this case. 

27.	Conversely, the Applicants accept that when the court is later asked to sanction the scheme, a former policyholder will be entitled to be heard (pursuant to FSMA 2000 section 110) if he alleges that he would be adversely affected by the carrying out of the scheme. The Applicants also accept that when the court later considers all the circumstances of the case for the purpose of deciding whether to sanction the scheme pursuant to FSMA 2000 section 111(3), the court may be asked to consider the position of former policyholders amongst the relevant circumstances. 

28.	The Applicants do not say that the court has no power at this stage to impose a direction that they notify former policyholders. The Applicants appear to accept that the court can do so pursuant to its ordinary case management powers. In view of the provisions of sections 110 and 111(3), the Applicants wish to have the question as to whether notice of the application should be given to former policyholders determined at this stage rather than face argument on that question at the later stage when the court is asked to sanction the scheme. The Applicants would be concerned if the court were at that time to take the view that it was not prepared to sanction the scheme unless and until notice of the application was given to the former policyholders. That could cause unwelcome delay to the Applicants. If the court decides that it is appropriate to impose on the Applicants a direction that they notify former policyholders, the Applicants would prefer to know of that requirement at this stage (when it will be complied with) rather than at a later stage.

29.	The Applicants contend that it is not appropriate for them to be required to notify former policyholders of CICA UK for the following reasons -

(1)	The former policyholders have at most a contingent claim to compensation, that is, a contingent claim to be a creditor of CICA.

(2)	The Regulations do not require notice of the application to be given to the creditors of CICA UK and the FSA does not propose that notice of the application should be given to any other creditor of CICA UK. The Applicants referred in passing to the different provisions which are made in the Companies (Cross-Border Merger) Regulations 2007 and to the provisions of the Companies Act 2006 dealing with reductions of capital (Part 17, Chapter 10) and arrangements and reconstructions (Part 26).

(3)	If any former policyholder contacts CICA UK or AEGL or AELL before the transfer takes place, AEGL and AELL are prepared to undertake to send notice of the application to such former policyholder. If any former policyholder contacts CICA UK or AEGL or AELL after the transfer has taken place, AEGL and AELL are prepared to undertake to send notice to such policyholder that the transfer has taken place. Any such policyholder will also be informed that AEGL and AELL are responsible for conducting the PBR and will be liable for any compensation that may become due to former policyholders of CICA UK.

(4)	AEGL and AELL are prepared to undertake that should the PBR find that these former policyholders have possible claims to compensation it will notify them of (i) their right to make a claim for compensation and (ii) that the liability to pay any compensation they may be due has been transferred to AEGL and AELL by the Scheme. 

(5)	It has not yet been established that these former policyholders have any claim to compensation, nor what (if any) compensation may be due.  The pilot stage is not likely to be completed until about September 2012. Only once this is complete will it be established if it is likely these policyholders may have claims.  To inform former policyholders of the contingent claim prior to the transfer may give them a misleading impression that they have a possible claim before this has been properly assessed. Such consumer confusion should be avoided.

(6)	The draft scheme report has considered the position of former policyholders whose policies are included in the PBR and clearly concluded that neither they nor their security will be adversely affected by the scheme. It is unrealistic to expect the former policyholders to second guess this analysis.

(7)	On a cost-benefit analysis, it would be disproportionate to send the notices, taking into account the cost and the very limited benefit.  There are some 290,000 former policyholders of CICA UK and giving them notice would cost some £285,000. In this case, it is very hard to see why any PBR policyholder would have any reasonable cause to object taking into account the strength of covenant of AEGL and the conclusions in the draft scheme report. 

(8)	Former policyholders will be notified by the extensive advertising campaign in relation to the scheme which is planned, which includes newspaper adverts in the Times, the Financial Times, the Daily Mail and the Sun. If it was thought appropriate, the Applicants are willing to include an additional line in such notices making it clear that if any former policyholders have any comments in relation to the proposed scheme they should also contact the Applicants. Any comments so received would be presented to the court at the final hearing alongside any comments received from current policyholders.

(9)	The existing policyholders of CICA UK, who will be notified in accordance with Regulation 3(2)(b), are likely to have a similar status (as regards a possible claim to compensation) to that of the former policyholders. There are some 266,000 existing policyholders of CICA UK who will receive such notice. These policyholders hold between them some 524,000 policies. If it could be alleged that the scheme would have an adverse effect on the 290,000 former policyholders, then it is likely that it could equally be alleged that the scheme would have an adverse effect on the 266,000 existing policyholders. Those 266,000 existing policyholders will be notified of the scheme and will be able to put forward such an allegation.

(10)	When the court comes to consider whether to sanction the scheme, it will be able to take account of all of the circumstances. To assist it, the court will have the scheme report and the report of the FSA. It will also have any views expressed by the existing policyholders who will have been notified of the application. The Applicants also have a duty to assist the court. Finally, the court is not a rubber stamp. The court will apply the principles identified in Re London Life Limited (21 February 2009, Hoffmann J, unreported) and in Re AXA Equity & Law Life Assurance Society plc [2001] 1 All ER (Comm) 1010 (Evans-Lombe J). The matters referred to in this paragraph will provide more than adequate safeguards for the former policyholders.

The submissions for the FSA

30.	The report submitted by the FSA set out in detail its reasons as to why the court should direct the Applicants to give notice of the application to former policyholders of CICA UK. Those reasons were also the subject of detailed written and oral submissions made by Mr Purves on behalf of the FSA. I will now summarise the various points that were made by and on behalf of the FSA.

31.	The former policyholders are not like the other groups of policyholders who it is agreed will not receive individual notification of the proposed transfer. Those other policyholders have policies which are not being transferred. But the liabilities of CICA UK to its former policyholders are being transferred.

32.	The former policyholders are also different from creditors of CICA UK where CICA UK’s liabilities to those creditors are being transferred. Those creditors are likely to be trade creditors with a certain degree of financial sophistication. The same cannot be said for the former policyholders in this case.

33.	The FSA as a regulator is concerned with the position of the former policyholders as well as with the position of current policyholders.

34.	As set out above, the PBR is expected to be relevant to some 290,000 former policyholders. In the FSA’s view, the following factors are relevant to the question of whether or not the former policyholders should be individually notified of the Scheme -
(1)	Former policyholders may be entitled to redress, whether in the form of compensation, a goodwill payment or otherwise. The scale of redress that may be required as a result of the PBR is presently unknown, but may be large overall and may be significant for individual former policyholders.
(2)	Under the terms of the Scheme, liability for completion of the PBR and any form of consumer redress required to be made following the PBR will be transferred from CICA UK to AEGL and AELL.
(3)	The PBR will not be completed and any potential consumer redress will not be determined until after the proposed effective date of the scheme.  The former policyholders therefore have a real interest (both financial and non-financial) in the outcome of the scheme and the right (under FSMA 2000, section 110(b)) to be heard if they believe the scheme will affect them adversely.  In that respect, a former policyholder is in precisely the same position as a transferring policyholder of CICA UK who has not yet made any claim under a transferring policy.

35.	The FSA accepts that many of the former policyholders may not be financially sophisticated.  In the FSA's view, even if the notices about the scheme published in the Gazettes or in newspapers contain a reference to the PBR, former policyholders are highly unlikely to realise that even though they are no longer policyholders of CICA UK, they nevertheless have a financial interest in CICA UK, which will, if the scheme is approved, be transferred to a different insurance company.

36.	Whilst the independent expert considers that the former policyholders will not be adversely affected by the transfer, the FSA considers that the former policyholders should be given the opportunity to form their own opinion on this matter, in the same way as the transferring policyholders.

37.	If the former policyholders are not notified they will not make any representations. The newspaper advertisements in relation to the proposed transfer are unlikely to be read by them and, even if read, it is unlikely that former policyholders will consider that they could be affected by the proposed transfer. That is likely to be the case even if the newspaper advertisements contain a sentence referring to the PBR. If the former policyholders do not make representations, the result will be that the independent expert and the FSA and the court will be blind to the views of the former policyholders and will have to make their various decisions without being aware of such views. That is undesirable.

38.	The FSA's Principles for Business impose requirements on CICA UK, AEGL and AELL to pay due regard to the interest of their customers and treat them fairly (principle 6) and to pay due regard to the information needs of their clients, and communicate with them in a way which is clear, fair and not misleading (principle 7).  The FSA is not persuaded that a transfer of business that does not include individual notification of former policyholders would be commensurate with these requirements.

39.	The estimated cost of individual notification to the former policyholders (some £285,000) is not, in the FSA's view, disproportionate having regard to:
(1)	The benefit to be derived from individual notification of former policyholders by enabling them to make a properly informed decision as to whether or not to object to the scheme;
(2)	The estimated £47 million in premium income generated by CICA UK from the sale of the insurance business that is the subject of the PBR;
(3)	The cost savings and capital benefits expected to be realised by the Applicants from the successful completion of the scheme (which the FSA understands is expected to be in the region of £1 million operational cost savings per year (based on CICA UK’s 2010 estimate) and £90 million capital benefit (based on a capital release of £140 million, offset against capital injection of £50 million)); 
(4)	The fact that the class of former policyholders exists entirely because of CICA UK’s widespread regulatory failings, as established by an FSA enforcement investigation; and
(5)	It is entirely CICA UK’s choice to pursue the scheme before completion of the PBR.

40.	Taking all these factors into account, it is the FSA’s view that the former policyholders should be notified individually about the proposed scheme and its relevance to them in light of the PBR. Individual notification would:
(1)	allow CICA UK to explain the scheme and PBR to the former policyholders in clear and simple language, with sufficient detail to enable the former policyholders to understand the significance of the PBR and the scheme to them; and
(2)	inform former policyholders of their right to be heard in the way best calculated to ensure that they make an informed decision as to whether or not to object to the scheme.

41.	The FSA has, on more than one occasion, requested that a firm applying for a transfer of business should notify certain classes of person affected by such transfer, in addition to notifying the relevant policyholders. These additional notification requests are made where the FSA considers that the additional notification would mean that: a)  the firm in question would be acting in accordance with the FSA Principles for Business (as set out above); and b) in furtherance of the FSA’s regulatory objective to protect consumers. The FSA is not aware of any previous case where a direction to notify persons affected by the transfer of business has been sought, since all additional notification requests have been resolved by the FSA and the firm in question prior to the directions hearing. Nevertheless, the incidence of mis-selling and other conduct of business related issues in the insurance industry suggests that this is an issue that may well arise in the future.

Discussion

42.	There is considerable force in the arguments put forward on both sides. I will now indicate my reaction to the principal arguments. Some of the points in play involve matters of degree. In my view, there is no one single argument which carries the day. I have to weigh up the rival considerations and then determine whether the result of that balancing exercise is in favour of the court giving the direction which is sought by the FSA.

43.	Neither FSMA 2000 nor the Regulations made under section 108 require the Applicants to give the direction which is sought. On the other hand, the court can impose such a direction with a view to giving information to the former policyholders who, it is agreed, are potentially entitled to be heard at the later hearing when the court is asked to sanction the scheme.

44.	The Regulations impose requirements as to general notification, by advertisement, of the proposed transfer. Such general notification theoretically provides the same benefit to former policyholders as it does to current policyholders. However, if all that happens in relation to former policyholders is that there is a general notification by advertisement, it is highly unlikely that many, if any, former policyholders will consider that the proposed transfer has anything to do with them. This will probably also be the case even if the advertisement mentions the PBR. This will be because the former policyholders are not thought to be financially sophisticated, will probably not find the advertisement to read it in the first place and even if they read it would still not see that it has anything to do with them.

45.	The Regulations made under section 108 place the current policyholders of the Applicants in a special position as the persons who should receive individual notification, although this requirement is subject to the possibility of waiver. The Regulations do not mention the creditors of the parties. There are likely to be a number of reasons for this. One reason might be that there is a difference between a current policyholder who will have a future and continuing relationship with the Applicants and a creditor whose rights may have crystallised as a result of past events. That reason will not be universally applicable; for example, a landlord of an applicant company is likely to have a future and continuing relationship with such company. Another reason might be said to be that creditors of insurance companies are likely to be trade creditors and fairly financially sophisticated.

46.	The former policyholders in the present case are different from current policyholders but they are also different from trade creditors. The former policyholders do not have a continuing relationship with CICA UK in the way that current policyholders have but, because of the intervention of the FSA and the ongoing PBR, there is an area of unfinished business arising out of the fact that former policyholders at one time had policies with CICA UK. The former policyholders are like current policyholders in the sense that any liabilities of CICA UK to former policyholders are being transferred just like the liabilities under current policies.

47.	If former policyholders are given individual notification of the proposed transfer, without more, it is unlikely that they will consider that the proposed transfer has anything to do with them. Former policyholders could only begin to see the relevance of the proposed transfer if they were told about the PBR and what might emerge from it. 

48.	I understand that if the proposed transfer were not happening at the present time, then there would be no suggestion that all former policyholders would automatically be individually notified of the fact that the PBR is underway. Unless it were necessary for the purpose of the PBR itself to contact a former policyholder (for example, to ascertain whether a former policyholder had suffered detriment or to resolve the amount of any compensation payable) former policyholders would only be notified of the PBR when it has been completed and the result of the PBR makes notification appropriate. That suggests that it is not appropriate to inform all former policyholders of the PBR until there is certainty as to the result. Informing them of the ongoing process is not considered to be necessary and might even be unhelpful. It might be unhelpful because there is no certainty as to what will emerge either as to the fact of entitlement or as to the sums that might be involved.

49.	If individual notification is to be given to former policyholders, the notice will have to explain something about the PBR to show the former policyholders why the proposed transfer might be relevant to their position. If former policyholders were sophisticated enough to investigate whether the proposed transfer would be likely to affect their position, on the material at present available, they would be highly likely to consider that the proposed transfer would not adversely affect their position. After all, that is the conclusion at present reached in the draft scheme report. Although this hearing is not the hearing at which the views in the scheme report will be finally assessed by the court, it is nonetheless accepted that the court can pay attention to the draft scheme report if its contents are relevant to a point which arises at this stage. After all, the FSA agreed that the court could pay attention to the draft scheme report when considering whether it was appropriate to waive some of the requirements of the Regulations in relation to policyholders whose policies were not being transferred.

50.	If former policyholders showed an interest in the notification to them, it is highly likely that they would show a greater interest in the possible result of the PBR and show little or no interest in the possible impact of the proposed transfer.

51.	As indicated earlier, in the absence of the proposed transfer, it would not be suggested that all former policyholders would be notified of the PBR at this stage. Thus the result of notification as suggested by the FSA would result in notice being given which would otherwise not be thought to be necessary or appropriate.

52.	Notice to former policyholders at this stage of the PBR could be less than helpful to them. There is no certainty about the outcome of the PBR. The result of notice of the PBR at this stage might lead to a measure of confusion or even the raising of false hope. No doubt, the notification would do what it could as a matter of drafting to prevent the raising of false hope but careful drafting is unlikely to be able to eliminate this possibility.

53.	The suggestion that the independent expert and the FSA and the court should not act in ignorance of the views of former policyholders was very persuasively argued. However, the force of that suggestion is greatly diminished by the FSA’s other submission that the former policyholders are unlikely to be financially sophisticated. In this case, it is unreal to think that the independent expert and the FSA, who are both financially sophisticated, will miss relevant matters if they do not have those matters pointed out to them by the former policyholders. When the court comes to make its decision it will have the considerable advantage of the views of the independent expert and the FSA.

54.	Further, any point which would be available to a former policyholder is highly likely to be available also to a current policyholder who, in addition to his interests under his policy, will have his status as a person potentially affected by the outcome of the PBR.

55.	I should approach the matter in a realistic and not a theoretical way. I should assess the real benefit of the suggested direction and compare that benefit with any disadvantage from making that direction.

56.	In my judgment, having regard to the above considerations in particular, I regard the benefit to former policyholders of receiving individual notification and the resulting benefit to the independent expert, the FSA and the court as being insubstantial.

57.	Conversely, I can see disadvantages of individual notification to former policyholders at this stage. Such notification could possibly cause a measure of confusion and may generate inappropriate false hope. It is also likely to give rise to inquiries of the Applicants which are not directed to the proposed transfer but which are directed to the possible outcome of the PBR. Those inquiries could be time consuming and costly to some extent for the Applicants but yet the benefit to the former policyholders of being given information at this stage would be very limited.

58.	I regard the cost of giving individual notification to the former policyholders as a disadvantage to the Applicants. In a very general sense, the amount of the relevant premium income earned by CICA UK and the savings which will flow from the proposed transfer set the scene for a judgment as to whether £285,000 is a modest sum of money or a very large sum of money in this case. However, what is far more material is the benefit, if any, which will flow from that expenditure and whether a comparison of cost and benefit favours the giving of individual notification, or otherwise.

59.	My overall conclusion is that it is not appropriate to impose on the Applicants the direction which is sought by the FSA.

The result

60.	I will give the directions which have been discussed and identified at the hearing but I will not include the direction as to individual notification to former policyholders as requested by the FSA.

61.	The form of advertisement or notice to be given is not specified in the draft directions. Although the forms have been largely agreed between the Applicants and the FSA, there is no agreement as to what should be said about the PBR in the forms of notice to current policyholders. The Applicants and the FSA will need to address that matter in the light of the comments in this judgment. If that matter cannot be resolved, an application may need to be made to the court for a decision on the point.