On 1 February 2016, the FCA & PRA published a total of ten final notices disciplining a variety of insurance firms and their senior management following a lengthy joint investigation. This is the first time that the two regulators have taken coordinated action against a combination of insurers, intermediaries and individuals in the insurance market, and signals that there may be future enforcement activity to come in the general insurance sector.

The investigations followed on from an ‘early intervention’ by the regulators in 2013 in relation to concerns about the validity of cover in the solicitors’ professional indemnity insurance market. As a result of that early intervention action – an approach we are seeing the regulators use ever more frequently – the regulated activities of the various firms were immediately halted and client money was ring fenced.

The disciplinary notices cover deliberate misconduct by some parties but also extend to systems and controls failings on the part of other parties. It is these systems and controls issues that are likely to be of most importance to many insurance firms.

The FCA notices

The FCA took action against five individuals and three firms – Millburn (an insurer); Coverall and Bar Professions (both intermediaries). The fines imposed totalled £15.5m and all of the individuals involved received forms of prohibition for significant integrity and/or competency failings.

The FCA said that the misconduct contributed to the failure of various insurance schemes and to three insurers (Millburn, Balva Insurance Company AAS and European Risk Insurance Company) going into administration.

Perhaps most notably, the FCA for the first time ever exercised its power to take action against an individual (Shay Reches) for carrying out a controlled function without the requisite approval (under s.63A of FSMA). Mr Reches was fined £1,050,000 and agreed to pay a further £13m to the three insurers (for the benefit of the FSCS and UK policyholders).

The PRA notices

The PRA took action against Millburn, an insurer which went into administration after its reinsurance arrangements did not respond. Millburn’s CEO, Colin McIntosh, was also fined and prohibited by the PRA.

Millburn was fined £2.8m for its failure to carry out adequate due diligence in arranging its reinsurance and to implement appropriate systems and controls to monitor and control the business that its managing general agent (and other coverholders) was writing on its behalf.

The PRA said that Millburn’s actions meant that it did not achieve the required degree of resilience to failure.

Warning to the rest of the insurance market

In what we would construe as a clear warning to the rest of the market, on announcing these enforcement cases the FCA specifically highlighted the wider significance of the outcomes as being reflective of a number of concerns of broad application that the FCA has identified as part of its ongoing supervisory and thematic work – including its June 2015 thematic review entitled ‘Delegated Authority: outsourcing in the general insurance market’.

In particular, the FCA highlighted the following concerns:

  1. The lack of due diligence applied by market participants when selecting potential insurance and reinsurance security;
  2. Poor understanding and scrutiny of appointed representatives and those carrying out other delegated authority functions;
  3. The need for clarity and certainty about roles and responsibilities;
  4. The responsibilities of intermediaries used in the distribution chain;
  5. The lack of understanding and correct application of the client money rules; and
  6. The lack of adequate systems and controls in ensuring client money is protected.

What should insurers and intermediaries be doing?

The FCA is always keen to follow up supervisory and thematic work with enforcement outcomes wherever appropriate. As a result, particularly where insurers and intermediaries are involved in complex distribution chains involving delegated authority/outsourcing arrangements, the risk of enforcement action is heightened.  We would recommend that firms review their ongoing arrangements, including procedures for undertaking effective due diligence on counterparties, to ensure that they are aligned with the regulators’ expectations.

Firms should also be aware that the FCA is currently undertaking a thematic review into oversight of appointed representative arrangements. Those firms that have appointed representatives should ensure that they consider the FCA’s findings when they are published and review their own arrangements.