Financial Services and Markets Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Wednesday 8th July 2026 Grand Committee

Moved by

[Baroness Bowles of Berkhamsted]

162: Clause 44, page 51, line 21, at end insert—
“(5) After section 284A insert—“284AA Tax treatment of risk transformation arrangements(1) The Treasury must, after consultation with the Commissioners for His Majesty’s Revenue and Customs, publish guidance concerning the tax treatment of investments issued in connection with risk transformation arrangements within the meaning of section 284A.(2) Guidance under this section must include the circumstances in which a risk transformation arrangement is to be regarded as having been entered into for genuine insurance risk-transfer and capital markets purposes. (3) In exercising functions relating to the assessment, collection and management of taxes, the Commissioners for His Majesty’s Revenue and Customs must ensure that arrangements falling within a description specified by guidance under subsection (2) are treated in a consistent and certain manner.(4) Where—(a) a risk transformation arrangement falls within a description specified in guidance under subsection (2), and(b) the arrangement complies with applicable requirements relating to authorisation and supervision,the arrangement is to be treated for all tax purposes as a commercial arrangement entered into for bona fide insurance risk-transfer and capital markets purposes, and not as having as its main purpose, or one of its main purposes, the obtaining of a tax advantage.(5) The treatment in subsection (4) applies without any requirement to consider the purpose of the arrangement other than by reference to the conditions in that subsection.(6) Subsection (4) does not apply only where the Commissioners can demonstrate that—(a) one or more of the conditions in subsection (4) is not met, or(b) there has been fraud, deliberate misrepresentation, or material non-disclosure of relevant facts.(7) The Treasury must review guidance published under this section at intervals not exceeding three years.””Member’s explanatory statement
The amendment requires HM Treasury to produce guidance in consultation with HMRC to confirm the tax status of Insurance-Linked Securities vehicles.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, this amendment is about insurance-linked securities—ILS—which are the UK’s version of fully funded risk transfer vehicles, which were legislated for in 2017. They include catastrophe bonds, collateralised reinsurance, sidecars and other fully funded mechanisms used by insurers to transfer peak and speciality risks to the capital markets. Catastrophe bonds are the most visible part of the market, but they represent only a portion of a global ILS market now estimated at over $136 billion. The catastrophe bond market alone is estimated at somewhere between $35 billion and $65 billion.

When the regime was introduced, the hope was that London, as the world’s leading commercial reinsurance marketplace, would become a major provider but, almost immediately, Singapore copied the PRA’s work and moved faster. I recall hearing evidence about this when I was on the Industry and Regulators Committee before the formation of the Financial Services Regulation Committee. At that time, the PRA was being blamed for sluggishness. However, it is not the problem now. Since then, London has not built a substantial market, and we now have only 2% of the global market that we should have led.

Clause 44 on transformer vehicles is part of the reforms to which the Government have committed under the Leeds reform package. Those reforms are welcome. They will improve flexibility and the ease of delivering transactions, including allowing the PRA to widen the scope of permissions. But even with Clause 44, one major block remains: tax uncertainty. HMRC continues to rely on a main-purpose anti-avoidance test that is inherently subjective. Investors and sponsors are forced into a costly, months-long clearance process with the Treasury for every single transaction. This destroys the speed to market that is required for catastrophe bonds, so they are out of the game. There is no hope of competing with jurisdictions that do not impose this hurdle, which rightly puts more trust in these fully funded, transparent risk transfer mechanisms. They are not tax-driven structures, yet they must prove that fact afresh every single time for every single contract.

A competitive ILS market cannot grow while this situation prevails. The window of opportunity closes before HMRC’s clearance process reaches a conclusion. When Parliament created the ILS regime in 2017, it included a deliberately broad anti-avoidance clause because the market was new. Ten years on, HMRC should be comfortable that these are not avoidance vehicles. There are no cases of mass tax avoidance via these vehicles. They are, by definition, highly regulated and fully funded, yet HMRC appears unwilling to update its existing guidance. Some recent case law on avoidance purposes has only increased uncertainty. The existing guidance is non-binding and investors cannot rely on it. Amendment 162 would require the Treasury to publish clear guidance that provides a presumption of commercial purpose for vehicles that meet all regulatory and authorisation requirements. It would shift the burden of proof away from the investor and provide the certainty that our major competitors already offer as a matter of course.

This is not the only area where the clearance culture is acting as a drag on growth and competitiveness. It also affects infrastructure investment, and it casts a long shadow over the Mansion House Accord. How can we expect a trustee to back a vital infrastructure project if they fear that the tax status of the vehicle will be held hostage by a subjective, years-long tax process? The Government have recognised the need for certainty by launching the Advanced Tax Certainty Service this July, but that service is restricted to multi-billion-pound megaprojects; they are looking after their own. This might work for the largest infrastructure schemes, but what of the hundreds of medium-sized and local infrastructure projects and the ILS transactions that form the backbone of our growth agenda?

I recognise that tax avoidance is a sensitive subject, and that none of us wants a return to the abuses of the past, but there is a world of difference between a structure designed to extract value from a company—that is cheating—and a structure designed to ring-fence risk for a power plant or a catastrophe bond. One is misuse of corporate law and the other is a structural necessity of it. HMRC’s current main-purpose test fails to distinguish between the two and treats structural necessity as a potential abuse.

--- Later in debate ---

[Lord Stockwood (Lab)]

My Lords, risk transformation is a key element of the UK’s insurance market, and the growth of this market is critical to the Government’s objective of making the UK the location of choice for specialist and complex insurance. The Government’s reforms in Clause 44 aim to support this market by increasing the attractiveness of the UK for establishing the legal vehicles used to undertake risk transformation. I am glad to hear the noble Baroness, Lady Bowles, and the noble Lord, Lord Ashcombe, broadly welcome these reforms.

The Government recognise the role that the bespoke tax regime for transformer vehicles plays in ensuring that the UK is competitive in this area. We also recognise, as does this amendment, the role that robust anti-avoidance measures and clear guidance have in ensuring a well-functioning regime for transformer vehicles. These anti-avoidance requirements are set out in the bespoke tax regulations for transformer vehicles, the Risk Transformation (Tax) Regulations 2017. HMRC has worked extensively with industry to produce guidance on how anti-avoidance measures apply to transformer vehicles.

I appreciate that some people consider that this guidance could be clearer, but it is important that any guidance does not constrain the Government’s ability to apply anti-avoidance rules. It must be aligned with the broader approach taken by HMRC to anti-avoidance. The current guidance allows HMRC the flexibility effectively to pursue instances where vehicles are established for the purposes of avoiding tax. It is important that we preserve that ability. I therefore ask the noble Baroness to withdraw her amendment.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank all those who have spoken in the debate. I must say that I find the Minister’s response rather disappointing. He is saying that the status quo is all right, but the status quo is not all right, so we will not have the business. I think that is all there is to it. Surely, there must be a way in which you can have something that moves faster when you have to negotiate things faster: otherwise, the door is shut on these transactions. So I ask the Minister to engage with the industry on this and find out more detail, because it is being treated as if it is something dodgy. How will an investor invest in something that has a ticket on it saying, “Careful, I might be slightly dodgy”? That is in effect what is happening. How will we get these things into pension funds if the trustees are thinking, “Whoa, something might happen way down the track”?

These are very serious questions. I realise that it is very specialist, but we need to take action: otherwise, we are closing the door on opportunities for good investment and opportunities for pension funds. The fact that the ATCS solves the problem for really big infrastructure shows that the Government know what they are about when they are in the business of having to negotiate contracts, but the smaller people are being left out. That is just not the right way to proceed. So I hope that the Minister will report back to the Treasury and reread my speech and that of the noble Lord and come to a better conclusion. For now, I beg leave to withdraw my amendment, although I think that this is so important that I may wish to return to it on Report.

Amendment 162 withdrawn.