The PRA’s view of schemes of arrangement


A scheme of arrangement (scheme) is a compromise or arrangement under Part 26 of the Companies Act 2006 which may allow companies to reach a binding compromise with their creditors to discharge all remaining assets and liabilities. If certain majority approval thresholds are met, the terms of the scheme (once sanctioned by the Court) are binding on the company and on all creditors, regardless of whether individual creditors originally voted for the scheme.


Schemes proceed under the Companies Act 2006 rather than FSMA. However, the PRA has an interest in the potential use of schemes by insurers because of its statutory objectives, and in particular its objective to contribute to securing an appropriate degree of protection for insurance policyholders. For example, the PRA has explained in its Approach Document that it wishes to ensure that firms are able to exit the market in an orderly manner. In such circumstances, the PRA wishes to ensure that policyholders have an appropriate degree of continuity of cover against insured risks.


The PRA recognises that, in some circumstances, the use of schemes of arrangement by insurance companies may be compatible with its statutory objectives. For example, the use of a scheme by an insurer in insolvency may be in the interests of policyholders generally due to the effect of the maximisation of the pool of assets available to distribute to creditors or in allowing a quicker distribution.


However, the PRA also believes that, in other circumstances, the use by insurance firms of schemes of arrangement may not be compatible with its statutory objectives. For example, where a firm proposes the use of a scheme when the firm meets its regulatory capital requirements and expects to be able to continue to meet all legitimate claims as they fall due. Such a firm may be more likely to want to exit from a particular portfolio of business for commercial reasons. This may not be compatible with the PRA’s statutory objectives – in particular, the insurance objective – given the way in which such schemes may compromise policyholder cover in situations where the firm could otherwise pay claims in full as they fall due.