The UK government has proposed amendments to the Bank of England and Financial Services Bill (the Bill), which if enacted, would pave the way for Insurance Linked Securities (ILS) and collateralised reinsurance business activity in London.

The latest draft of the Bill includes a proposal for the insertion of a new provision in the Financial Services and Markets Act 2000, entitled “Transformer vehicles”. A transformer vehicle is defined in the Bill as “an undertaking (“A”), which is established for the purposes of carrying on… or carries on ” the following activities:


  • “assuming risk from another undertaking (“B”),” and
  • “fully funding A’s exposure to that risk by issuing investments where the repayment rights of the investors are subordinated to A’s obligations to B in respect of the risk.”



The proposed provision, if enacted, would give the Treasury the power to adopt provisions for regulating “the establishment and regulation of transformer vehicles”, and notably “for such body to comprise different parts” and “for such parts to have legal personality distinct from that of the body”. This would be the first time that the concept of protected cell structures would be introduced under English law, enabling each ILS risk to be segregated from other parts of the transformer vehicle’s business.


The proposed provision would also give the Treasury power to:


  • “confer functions on the FCA or the PRA (including the functions of making rules and giving directions)” and
  • “authorise the FCA or the PRA to require the Council of Lloyd’s to exercise functions on its behalf (including functions conferred otherwise than by the regulations)”. These provisions effectively grant the FCA, the PRA and Lloyd’s a role in overseeing transformer vehicles. This suggests that transformer vehicles could potentially also include Lloyd’s vehicles, which would grant ILS investors access to risks from the Lloyd’s market.


A line by line examination of the Bill took place during the final day of the Committee stage in the House of Lords on 11 November 2015. The proposed amendment was agreed to in that session, and it was ordered that the Bill be printed, as amended. The Bill is currently at the Report stage in the House of Lords. A further line by line examination of the Bill is yet to be scheduled.


These developments demonstrate that work is underway to meet the Chancellor’s commitment to “work with the industry and regulators to develop a new competitive corporate and tax structure for allowing Insurance Linked Securities to be domiciled in the UK” set out in the 2015 Budget Report.

A previous Cooley blog on ILS is available here.

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