More than a change of address: Reflections from previous part VIII transfers − speech by Manuel Sales

Opening remarks

Thank you for inviting me to speak today.

Having been in my role for a few months, I have been reflecting on the insights it has given me into how firms operate. One thing that has stood out about mutuals is not just that they are owned by their members, but how that ownership shapes the decisions they make. We can see this in the important role they play in serving parts of the market that may otherwise be underserved.

Against this background, you can understand why the Mutuals Landscape Report sets out our ambition to support the sector’s sustainable long-term growth. What that means will differ from one mutual to another. Many mutuals will continue to operate sustainably. Some will grow organically, while others may pursue acquisitions.

For some mutuals, the strategic challenge is different. They have told us that their current business models may not be sustainable over the longer term. The reasons for this include high levels of competition, keeping pace with technological change, and responding to rapidly-changing economic pressures. Some of these firms are responding by adapting their strategies and exploring new opportunities. Others are considering whether a solvent exit, including through transferring some or all of their business to another firm, may provide the best outcome for their members.

Where the firm being acquired is a friendly society, the transaction will take place through the Part VIII transfer process under the Friendly Societies Act 1992, with the PRA being ultimately responsible for deciding whether a transfer should proceed. While that process is grounded in legislation, we heard feedback that firms would benefit from having a clearer understanding of both the process itself and the factors that inform our decisions. In the Mutuals Landscape Report, we committed to providing more clarity, and CP12/26 (the CP) fulfils that promise. It sets out proposals intended to make our approach clearer and gives firms a more structured sequence of steps to follow. And alongside that, we are also improving the way we manage these transactions internally.

With these initiatives, we aim to promote a dynamic market and support sustainable growth of the mutuals sector.

But the PRA is not the only one working to make this process more efficient. We have also observed^{footnote [1]} practical approaches developed by firms to improve how these transactions are managed. Today, I want to provide an overview of the Part VIII process. As I do so, I will weave practical insights on how we have seen firms successfully navigate that process, so that others can benefit from the experience of previous transactions.

Reflections from a recent mover

Before turning to those insights, let me take a step back and explain why the process matters.

A Part VIII transfer can offer significant strategic benefits, such as realising economies of scale, improving service standards, and becoming more resilient. All of these improve outcomes for members. But it also requires firms to commit considerable time and resources, with the costs ultimately borne by members. At the PRA, we are very conscious that if a transfer cannot be confirmed, those costs may still have been incurred without the expected benefits being realised. That’s why we work with firms to try to help them build the evidence needed to demonstrate that the legislative requirements have been met.

Meeting those requirements is not just about ticking a legal box. Members rely on the safeguards built into the Part VIII process, including scrutiny by the PRA and FCA, to protect their interests.

So, how should firms approach the Part VIII process?

While no analogy can fully capture the significance of a Part VIII transfer, particularly for mutuals with long histories and strong member communities, it may be helpful in illustrating the process itself, especially for those who are less familiar with Part VIII transfers. The decisions surrounding a transfer are often complex and significant. But when it comes to the process, it has some parallels with moving house. Driving the moving van into your new driveway may feel like the culmination of the journey, but a successful move depends on everything that happened beforehand. You need to understand why you are moving, weigh up the options, complete the necessary checks, and prepare carefully for what follows.

The same is true of a Part VIII transfer.

As the slide shows, we have split that journey into five parts. Let me take each in turn.

Part A: Planning and preparation

Let me start with planning and preparation.

Every house move begins with a reason for moving. When my wife and I bought our home, we spent as much time discussing why we wanted to move as we spent choosing the house. Did we need more space? Or a shorter commute? Once we were clear about our objectives, many of the decisions that followed became easier.

A1: Intention to transfer, A4: Details of transfer plans

When similar questions are considered in the context of a Part VIII transfer, firms may have many avenues to explore. To help firms navigate these factors, the CP highlights the matters the PRA is likely to focus on early in the process, including members' interests.

Of course, firms will generally pursue a transfer because they believe it will deliver better outcomes for members. However, those benefits may not be shared equally between all members, and they may emerge at different times. It is possible that in some circumstances, particular groups of members could be worse off. The key question then is whether the transfer is in the interests of the members of each friendly society participating in the transfer.

Part of answering that question comes from how the benefits are expected to arise. Where a proposal relies on cost savings, operational changes, or integration programmes, those assumptions help explain how the combined business is expected to operate after the transfer. They can provide an important indication of whether there is a credible strategy and a realistic plan to deliver the expected benefits to members.

We have also found it helpful to consider the proposal from another perspective: in what circumstances might some members be worse off? Firms often undertake careful analysis of that question to understand whether potentially adverse impacts have been appropriately considered.

We can work with you as you develop your thinking in this area, which will help with later stages of the transfer. For example, some benefits may depend on integrating the two firms and could take several years to emerge. Whilst there are different ways to ensure that members will be protected in the meantime, the PRA can work with firms to establish what evidence could help show that the legal test has been met. These discussions could inform the transfer documentation, actuarial analysis, and communications with members.

A2: Preparations, updating rules, and applying for permission

Moving on to the preparations step, we have seen firms take a careful and considered approach to the practical aspects of the process. That includes considering whether the acquirer has the necessary regulatory permissions. This matters because permissions do not transfer with the business.

As an extra check, some firms have used the FCA’s register to compare the transferring society’s permission with the acquirer’s permission. This has allowed the acquirer to confirm whether it has identified and addressed any gaps in its permission.

This has also helped firms explain why a permission will no longer be required to cover specific regulated activities and, in doing so, show that the relevant statutory test has been met. These checks may appear relatively small. But when carried out early, they help the wider process run more efficiently.

A3: Considerations of overseas members and regulators

Turning to overseas members, this relates to one of the statutory tests, where the PRA must assess whether there is a substantial risk that the acquirer will be unable legally to carry on the business being transferred. This is usually relatively straightforward for members in the UK, but firms have found it more challenging for members based overseas.

Much of that work begins with a simple question: where are your members based? Maintaining up-to-date member records has helped firms with this work. There are other useful ways of checking those records. Some firms may find it helpful to consider payments to and from non-UK bank accounts to identify any other overseas members.

With that information in hand, firms can consider their overseas members in the context of the legal test and develop a reasoned explanation of why the legal test is met. There is a range of different forms of evidence to consider, from local legal advice to the relevant EIOPA recommendation^{footnote [2]}. The CP highlights engagement with overseas regulators, which firms may find to be a practical and cost-effective way of exploring the position.

While these steps should help, we recognise that firms continue to face challenges in this area. Indeed, we engaged with the Law Commission on the issue ahead of its recently published proposals. At our recent roundtable^{footnote [3]}, firms also suggested ways in which the PRA could help firms with the overseas member part of the process. We are considering if we can further clarify what information we might need from firms in order for the PRA to assess the legal test under the existing legislation. We will, of course, consider this feedback alongside any responses we receive to the CP.

A5: PRA’s approach to special resolution: consent for Part VIII transfers

Let me turn to the final part of planning and preparation: what many firms call the dispensation process. This is where the acquiring society can seek the PRA's consent for the transfer to be approved by its board, rather than through a special resolution voted on by its members.

Giving the acquirer’s members the opportunity to vote is an important safeguard, so it is not a requirement the PRA will dispense with lightly. But we also recognise that holding a vote comes at a cost, which is ultimately borne by members.

In the past, firms have told us that this is one of the less predictable parts of the process, so we have added more clarity on our approach in the CP. It provides some reference points for how the PRA is likely to consider whether to consent to a dispensation. One of these is that firms will also need to show that the transfer is in the interests of the acquirer’s members and that there are no factors likely to lead a material number of them to vote against it. Firms are likely to benefit from discussing this with their transfer partner and considering this point together.

For example, that collaboration may bring to light a history of tension between the societies that could influence how members would vote if they were given the opportunity. Factors like this don’t necessarily mean that consent couldn’t be granted. But open discussions on such matters can help the PRA understand the position more quickly and reduce the need for further questions.

Part B: Recording and analysing the transfer

Let me move on to recording and analysing the transfer.

Once my family had decided which house to buy, our attention turned to the practicalities. The paperwork began, surveys were commissioned and the important decisions had to be documented.

The same is true of a Part VIII transfer. Once firms have developed their proposal, the focus shifts to documenting the terms of the transfer and analysing its effects.

B1: Instrument of Transfer

Once firms are clear about the purpose and structure of the transaction, that understanding must be captured in the Instrument of Transfer. Producing the Instrument is a statutory requirement, but it can also provide important protections for the members of both firms.

The Instrument can cover a wide range of matters, from service standards to membership rights. We have seen firms benefit from bringing together legal, risk, and actuarial specialists to develop it. It has also helped firms consider not only what is needed to give effect to the transfer, but what additional protections could be provided to members, both now and over the long-term.

Those protections will depend on the circumstances of each transfer. We have seen firms consider important safeguards for the management of transferred funds, appropriate governance arrangements, and commitments about the future treatment of policyholders.

Where with-profits policies are involved, firms have found it helpful to specify the fund to which those policies will be allocated and how expenses will be apportioned. They have also considered what support may be available from other funds, particularly where this could affect the receiving fund’s investment strategy. Setting out these details in the draft Instrument can then provide a clear basis for the actuarial analysis supporting the transfer.

B2: Internal actuarial reports, B3: Independent actuary report and supplementary report(s)

The actuarial analysis is an important part of the process. Internal actuarial reports help boards and regulators understand how a proposed transfer is expected to affect members. Clear and balanced reports can also provide a strong foundation for communications with members, particularly where outcomes are uncertain or depend on judgement. The more useful reports explain the assumptions, evidence, and reasoning behind the conclusions they reach.

In our experience, the more complete internal actuarial reports consider how members are expected to be affected before the transfer, immediately after the transfer, as well as after any integration of the two businesses. This helps all of us – including members – understand both the destination and the journey to get there.

The firms’ own analysis is important. However, in some cases, the process also requires an independent perspective. Much as an independent surveyor provides an objective assessment when someone is purchasing a property, the Independent Actuary provides independent scrutiny of the firms’ analysis. The CP provides greater clarity on when we are likely to require a report from an Independent Actuary. We hope this will help firms better understand the likely costs of a transfer.

Where an Independent Actuary provides a report, the legislation requires it to address the likely effects of the transfer on members who are long-term policyholders. We have found that reports are most useful when they explain both the positive and adverse effects, how those effects may differ between groups of policyholders, and the basis for any conclusions about materiality. Of course, this balanced analysis helps members understand the proposal. But it also supports the PRA’s assessment of whether the transfer is in members’ interests, alongside the FCA’s consideration of fairness.

As an aside, we have found that it is often a good idea for firms to also consider any FCA requirements that apply to the transaction (for example, if the FCA's reattribution rules for with-profits business apply).

There is also an important relationship between the internal actuarial reports and the Independent Actuary’s report. If an internal report contains material information that is not reflected in the summary of the Independent Actuary’s report included in communications sent to members, firms will need to consider whether members have received all the information they need to understand the proposal and make an informed decision. This is one of the statutory tests the PRA must assess. In previous transfers, we have worked with firms to understand how they have met it.

Even where an Independent Actuary is not appointed, another form of independent review may still be valuable. We have seen firms benefit from independent peer review of their internal actuarial analysis and key judgements. This can strengthen the overall assessment and give members greater confidence in the analysis, particularly where they are considering whether to make representations about the proposed transfer.

Part C: Member engagement and member vote(s)

Having considered the key documents supporting a transfer, the next stage is to translate them into communications that members can understand and engage with.

When my family moved house, it wasn’t enough for me to know the plan. Everyone needed to understand what was happening, why it was happening and what it means for them (or, in our case, who was getting the biggest bedroom). Member engagement is similar. The technical analysis may be robust, but it only serves its purpose if members can understand what the transfer means for them.

C1: Member engagement: general approach, C2: Member engagement: Schedule 15 statement, C3: Resolutions

Member communications play an important role in informing how members vote. So, as you would expect, the FCA considers them through the lens of the Consumer Duty, with a focus on ensuring that they are clear and easy to understand. What makes the Part VIII transfer process slightly different is that the PRA also has a statutory role in reviewing one of the key communications sent to members: the Schedule 15 statement.

The CP provides more details on what the PRA considers as part of that review. I want to reflect on some practical approaches that we have seen work well in previous transfers.

The more developed Schedule 15 statements are those that clearly explain what the transfer means for members. They present the key considerations fairly and help members reach their own view. One approach that could work well is testing communications before they are finalised. We have read documents that include all the relevant technical details, but it is not always clear whether these messages are framed in the best way for members to fully understand them. To ensure that the proposed messages can be understood, it may be helpful to run the proposed communications past a colleague who has not been involved in the transfer or seek feedback from a small group of members.

We have also seen the value of careful and balanced drafting. The stronger summaries of the Independent Actuary’s conclusions tend to be those that faithfully reflect the full report while focusing on the matters most relevant to members’ decisions.

Of course, even the clearest communication is only effective if it reaches the people for whom it is intended. The legislation requires the Schedule 15 statement to be sent to all eligible voting members. Where firms have faced challenges contacting members, we have seen a range of practical approaches, including tracing exercises, updating records, using alternative contact methods, and contacting members directly to confirm their details. Firms have also used press notices and other engagement channels to raise awareness of the transfer and the voting process. In some cases, firms have supplemented this with dedicated webpages containing information about the transfer.

Although I have focused on the Schedule 15 statement, we have seen firms engage with their members in different ways. This includes with letters, frequently asked questions, presentations, webinars, and online material. The aim is to help members understand the proposed transfer and give them a genuine opportunity to engage with the proposal before casting their vote. Where members are effectively engaged, it helps firms address issues and reduce the likelihood of unexpected representations arising later in the transfer process.

Part D: Formal application, public notices, and representations

When buying a house, arguably the most important stage is the period leading up to the exchange of contracts. During that stage, surveyors, solicitors, mortgage brokers, and banks can all raise questions, identify risks or challenge assumptions underlying the proposed purchase.

D1: Formal notice of the application

The formal notice of the application plays an important role in the period leading up to the transaction, bringing it to the attention of interested parties and ensuring that those affected have an opportunity to engage with the process.

Firms will submit the formal notice after the member vote. So, whilst the progression of these tasks remains subject to member approval, there is preparatory work we can do ahead of that. In previous transfers, firms have provided draft notices for our review.

The PRA will also direct firms to publish the notice in the London, Edinburgh, or Belfast Gazettes as well as other newspapers where appropriate. However, firms can suggest which Gazette(s) and newspapers they feel would be the most appropriate.

D2: Approach to representations, D3: Representations Hearing

Once the formal notice has been published, the representations period begins. It gives members and other stakeholders an opportunity to raise concerns about the transfer.

But the representations process is about more than formal representations submitted directly to the PRA. Firms also consider whether concerns, complaints, or queries received through their own channels raise issues that are similar in nature to a formal representation. These interactions can provide valuable insight into the matters that are most important to members.

Part E: Confirmation Assessment Meeting(s) and related processes

The final stage of buying a house is exchanging contracts and moving into the property. By that point, much of the hard work has already been done. The legal issues have been addressed and the financing agreed. What remains is to finalise the purchase arrangements. The same principle applies to the final stage of a Part VIII transfer.

E1: Preparations for the Confirmation Assessment Meeting(s), E2: Confirmation Assessment Meeting(s)

The Preclusion Grounds Analysis sits at the heart of this stage. It explains why none of the statutory grounds that would prevent the PRA from confirming the transfer have been met. The stronger submissions tend to be balanced and leverage the evidence already generated throughout the transfer process and present it in a thorough and structured way.

Let me give you an example. When looking at the solvency ground, some firms carefully consider whether the acquiring society will maintain an adequate margin of solvency after the transfer. They bring together the evidence supporting that conclusion, such as post-transfer financial projections, actuarial analysis, audited financial information, and any material changes since the latest valuation date.

We have seen a similar approach taken when considering whether the members’ vote was representative. Firms’ analysis usually explains why the requirements of the legislation and the relevant society rules have been met. The more developed analyses also consider factors such as how voting turnout compares with previous member votes and whether the outcome would have changed under different assumptions. For example, where some members could not be traced despite reasonable efforts being made to contact them, firms could consider whether the outcome of the member vote would have been different if those members had voted against the transfer.

Perhaps the area where we have seen the greatest variation is the assessment of whether the proposed transfer is in the interests of the members of both societies. The more developed analyses bring together actuarial, risk, and legal evidence to consider factors such as benefit security, benefit expectations, service standards, and membership rights. They also identify situations in which some members may be disadvantaged and explain how those risks have been assessed and mitigated.

In considering firms’ post-transfer target operating models, we have taken a proportionate approach, with discussions often centred on three related questions.

• How will the enlarged business operate immediately after the transfer?
• What is the target operating model?
• How does the firm intend to move from one to the other?

E3: The PRA’s decision, E4: Processes after the Confirmation Assessment Meeting(s)

After the PRA has reached its decision, it is not the end of the journey. There are a few procedural steps left including issuing the decision notice and registering the Instrument of Transfer.

Firms will also continue implementing aspects of their target operating model after the transfer has completed. Boards should continue to satisfy themselves that members are seeing the expected benefits from the transfer.

Closing remarks

I appreciate that this statutory process may feel a long and complex journey. But members rely on the safeguards built into the Part VIII process, including scrutiny by the PRA and FCA, so it’s right that we approach the statutory requirements with care.

At the same time, we recognise that members ultimately benefit from an efficient process. CP12/26 sets out our proposals to make our approach clearer, more transparent, and easier to navigate. Your engagement has already informed those proposals, and I would encourage you to respond to the consultation so that we can continue refining our approach together.

I don’t want to close without recognising the important work being undertaken by the Law Commission to modernise the legislative framework for friendly societies. We have engaged with the Law Commission as it has developed its final report and draft bill. Should any legislative changes be made, the PRA stands ready to update its approach and guidance as necessary.

I hope that what I’ve shared today will highlight that a successful transfer is not simply about completing a transaction or changing an address. It’s about finding the right long-term home for a friendly society’s members.

I am grateful to Hannah-Kousar Rashid for preparing these remarks. I am also grateful to Abi Batchelor, Alex Tapp, Giles Woodruff, Nozipho Gazi, Robert Kipling, Robyn Dwyer, Sanjeev Chandran, and Wayne Snow for their support and comments.