Is insurance the only option for scheme benefits?
If your business operates a membership scheme that provides insurance-related benefits to scheme members – such as healthcare support, customer service guarantees, product warranties and the like – the future uncertainty and cost of insurance cover is likely to seriously impact your scheme business plan and perhaps the viability of your business.
Many of the pre-lockdown assumptions made by business leaders about the availability of A-rated insurance capacity to support membership scheme benefits have now gone out of the window. Even if insurance capacity is available – and that’s an increasingly big if – the rising cost of it is now proving prohibitive for many.
So, are there any options which are both compliant from a regulatory perspective and commercially efficacious?
Some businesses are exploring the possibility of re-structuring scheme insurance arrangements to take them outside the scope of FCA regulation and so removing the reliance on the volatile insurance markets.
It is sometimes possible to deliver scheme benefits via a discretionary arrangement. With care, such arrangements can be structured to avoid the scheme sponsor falling foul of the general prohibition in the Financial Services and Markets Act 2000 – namely, engaging in the regulated activities of effecting or carrying out contracts of insurance and insurance distribution.
The re-structuring of a scheme in this way commonly involves a three-stage process.
Stage 1: Establishing the right vehicle
It is important to select a vehicle for the discretionary arrangement that is appropriate for the proposed scheme. There are several options to consider, including:
- A company limited by guarantee which provides discretionary benefits to its members from contributions made by the members.
- A company limited by shares which provides discretionary benefits to its members from subscription payments made by the members.
- A limited liability partnership whereby benefits are provided to members of the partnership from capital contributions made by those members. Control is retained by you as a ‘designated member’ of the partnership with executive functions.
- A Friendly Society incorporated under the Friendly Societies Act 1992 whereby benefits are provided to members of the Society from contributions made the members. Although the Society would not be carrying on regulated activity, it would still have to register with the FCA, in a similar way that companies must register with Companies House.
Stage 2: Taking specialist professional advice
Specialist professional advice should include accountancy and tax advice, actuarial advice, legal advice, and regulatory advice to ensure the structure works as you and the beneficiaries of the scheme want and need it to. Actuarial analysis will inform the pricing and the appropriate level of any stop loss cover that may be required to protect the interests of the participating members and the scheme sponsors.
Stage 3: Drafting the scheme rules
The scheme rules will describe the type and scope of the benefits being provided and considerable care needs to be taken to ensure that the benefits do not inadvertently operate as a policy of insurance. The correct use of terminology is essential to retain the discretion of the scheme sponsor regarding the provision of the benefits, to ensure that the scheme sits outside of the scope of IPT and VAT, and to cover off any data protection or consumer legislation issues.
Removing your reliance on the turbulent insurance markets and lifting the burden of regulation could allow you to deliver to your business plans with significantly more confidence than may have been the case for some time.