The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have taken disciplinary action against three insurance firms and five senior individuals at those firms holding regulated positions. The eight Final Notices, which were issued by the FCA on 1 February, were the outcome of a joint investigation by the FCA and PRA into unauthorised schemes in the solicitors’ professional indemnity (PI) market. This concluded that there had been a failure in the management oversight throughout the distribution chains, significant integrity and competency failings, and failure to carry out adequate due diligence in arranging reinsurance.
Among those sanctioned by the FCA were UK insurer Millburn Insurance Company Limited (Millburn), Bar Professions Limited (Bar), a London broker specialising in solicitors’ PI insurance, and Coverall Worldwide Limited (Coverall), another intermediary. The firms and individuals were fined a total of £15.5 million.
The schemes used were highly complex, and led to the FCA liaising with over 20 regulators and agencies globally to carry out its investigations. In essence, the distribution chains involved using binding authorities issued by a managing general agent in London, Aderia UK Limited (Aderia), to various coverholders including Bar. Aderia was an appointed representative of Millburn and a UK insurance intermediary, Coverall, whose director Shay Reches was central to the unauthorised practices and he also controlled the main risk carrier, Sinclair Insurance Company. Mr Reches performed the CF1 (director) controlled function at Coverall, with responsibility for Aderia, which were central to establishing and operating the insurance schemes, despite note being approved to do so. In doing so, Mr Reches “recklessly” transferred insurance premiums to parties other than the (re)insurers who were responsible for paying the claims, thus increasing the risk that the policyholders’ claims would not be paid. According to the FCA Final Notice, the scheme also “contributed to” the administration of three insurers: Millburn, Icelandic insurer European Risk and Insurance Company and Balva, a Latvian insurer. It has also prompted the Financial Services Compensation Scheme to pay out £12.7 million as of the end of 2015.
This case is of particular interest to insurers because it is the first time that the FCA and PRA have worked together to take enforcement action against a combination of insurers, intermediaries and individuals. It is also notable due to its sheer scale. The insurance arrangements that were subject to regulatory investigation related to the insurance of 1,300 law firms in England and Wales.
Perhaps most significantly, the FCA has announced that the outcome of this case highlights a number of wider concerns that the FCA has about the insurance sector. This includes not only regulated activities carried out by unauthorised firms but also the responsibilities of intermediaries such as brokers. The FCA has stated that its concerns are as follows:
- Lack of due diligence applied by market participants when selecting potential insurance and reinsurance security.
- Poor understanding and scrutiny of appointed representatives and those carrying out other delegated authority functions.
- Need for clarity and certainty about roles and responsibilities.
- Responsibilities of intermediaries used in the distribution chain.
- Lack of understanding and correct application of the client money rules.
- Lack of adequate systems and controls in ensuring client money is protected.
This matter also highlights the fact that brokers and insurers are increasingly being held accountable for activities that they may previously have considered not to be their responsibility. This is particularly the case when insurers and brokers are involved in complex distribution chains involving delegated authority and/or outsourcing arrangements. Insurance firms must therefore continue to monitor their internal due diligence procedures very carefully to ensure they comply with the expectations of the FCA and PRA.
The FCA’s June 2015 thematic review TR15/7 Delegated authority: Outsourcing in the general insurance market is available at https://www.fca.org.uk/static/fca/documents/thematic-reviews/tr15-07.pdf.