HM Treasury have just published the consultation document entitled "Regulations implementing a new regulatory and tax framework for Insurance Linked Securities" (November 2016). I welcome these latest proposals on facilitating ILS business in the UK. The speed with which HM Treasury has produced the PCC Regulations is indeed impressive. I welcome this because it is another major recognition for the PCC regime internationally. We already have a Court Judgment of the US Federal Court of Montana that lends support to the cell structure and that too was an important milestone. The UK Government is currently looking for new trading relationships and initiatives and this is clearly consistent with that.
In my view the draft Regulations, on the whole, are well put together. I would have made certain changes if I had been involved in drafting them but still the Regulations, as currently drafted, work. HM Treasury have also done their home-work well, especially in making provision for cells to be treated as if they were separate legal entities for insolvency purposes. This is something I helped the Government of Gibraltar do when we amended our own PCC legislation. I therefore commend all parties concerned, especially HM Treasury, for the quick turn-around.
There is definitely potential for ILS transactions to be facilitated in UK, even ahead of the more established domiciles like Bermuda or Guernsey. The key to success (or not, as the case may be) will be how far HM Treasury can deliver on the expectations of the ILS market. But it is certainly within the power of HM Treasury to make this work. One of the challenges in a post-Brexit world will be ensuring that the 'delivery of regulation' does not stifle business development. The four core deliverables, in my view, are: speed to market, ease of access to the regulator, pragmatic (albeit robust where necessary) approach to regulation and business-friendly communication with stakeholders. If HM Treasury can deliver this, the UK could become a market-leader in the ILS space. If I were advising I would even be suggesting HM Treasury consider recruiting someone to head this regulatory division with ILS market experience that understands the needs of the industry. The harsh reality is that if you get it right, business can grow very quickly, but if you get it wrong you will never make it in this space.
Do I believe it is a mistake for HM Treasury to rule out use of PCCs for non-ILS insurance business? Not necessarily and I say that as a leading global advocate of PCCs. Let me explain why. For the UK to implement a PCC regime for ILS business is a significant advancement in itself. If I were HM Treasury I too would be thinking of expanding the use of PCCs in stages. The ILS PCC is an easy first step. These are low risk structures but with significant (relatively speaking of course) potential returns for the City of London. I am sure the relevant Minister will therefore keep the matter under review. Also, we must take into account that the UK is not a leading captive domicile. This, however, is something HM Treasury may want to explore next. If the UK could break into the international captive market, that would be an amazing achievement and then extending PCC legislation for captives would follow naturally from this. Of course, a legitimate criticism of global financial services regulation over the last 8 years is that it has largely shunned innovation and entrepreneurial risk-taking (as opposed to the excessive risk-taking of the pre-2008 years). If the UK Government can embrace the Brave New World by encouraging innovation and entrepreneurial risk-taking (which was at the heart of England's first Industrial Revolution that turned it into the leading global economic power), the UK will not only compete with Bermuda (and any other domicile) in financial services but potentially surpass them all.
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