On 14 November 2014 the FCA published the update on findings of its thematic review; ‘Managing bribery and corruption risk in commercial insurance broking’ (‘the Review’). Disappointingly, it found that, most of the wholesale insurance intermediaries it sampled were still failing to manage bribery and corruption (‘B&C’) risks adequately.
Given the interest that the FCA has taken in this area in the past and the enforcement action that has been taken against firms in this sector, as well as the raised awareness of risk in connection with bribery and corruption generally, it is very surprising that the industry is not in better shape. The outcome of the review has prompted further guidance and the FCA have fed that into their general guidance (Financial Crime: A Guide for Firms) which is relevant to all regulated firms. They are consulting on those changes now.
Background and context to the updated Review
The FSA’s interest in the commercial insurance sector followed its investigation into Aon Ltd in 2007. Suspicious payments had been made to a number of overseas third parties and the systems and controls to assess and mitigate risks around those payments were lacking. Aon Ltd was issued with a record-breaking fine of £5.25 million. It was during this investigation that the FSA discovered what it considered to be an industry wide problem and in late 2007 wrote a letter to the CEO of every broker firm (The Thomas Heurtas letter) requiring firms to review their business practices to ensure they were not involved in illicit payments.
Between 2008 and 2010 the responses to the Thomas Heurtas letter were considered and the FSA was able to form a picture of the anti-bribery and corruption (‘ABC’) standards in broker firms, they identified good practice and highlighted areas where sector firms needed to improve. In May 2010 the results of the thematic review were published; ’Anti-bribery and corruption in commercial insurance broking - Reducing the risk of illicit payments or inducements to third parties’.
The 2010 report found that there were common failings in the industry particularly in the approach of broker firms to higher risk business involving third parties. Systems and controls were weak and led to a significant risk of illicit inducements being paid to third parties to win business. Nov 2014 Review: ‘Managing bribery and corruption risk in commercial insurance broking’
The purpose of the Review was two-fold: to assess the industries progress since the previous review; and to consider whether businesses were addressing ABC adequately across their wider business. The FCA interviewed 10 medium to small size intermediaries (5 of which had been part of the 2010 review).
- Most intermediaries in their sample were still not adequately managing the risk that they might become involved in bribery or corruption.
- More than half had taken some steps but more needed to be done for ABC controls and systems to be seen as fully effective. Staggeringly, of the 5 firms not previously sampled, 3 were unaware of the FSA’s previous work in this area.
- Only half of those sampled had adequately identified and assessed bribery and corruption risk across their trading and non-trading business.
- In the remainder, some had not carried out a bribery and corruption risk assessment business-wide or they had looked at a limited number of relationships. For example they had looked at the next in the chain rather than the whole of the insurance distribution chain when considering their risk.
- There was rarely a holistic approach to risk in the business. Often the sample firms did not ‘join the dots’ to give an overall risk rating.
- Risk management oversight was generally weak. Even where firms had appointed a senior manager to oversee ABC, in most cases they lacked access to meaningful information about an intermediaries’ exposure to B&C risk.
The FCA expects all commercial insurance intermediaries to consider the findings and assess how they can improve their overall ABC systems. However, the recommendations are not industry specific. As a result of the on-going problems highlighted by the Review an update to ‘financial crime: a guide for firms’ is to be issued. This is designed to help all FCA-authorized firms and is subject to a consultation period which closes on the 6th February 2015.
It will include examples of good practice from both the ABC review and the recent review into anti-money laundering systems. It will also amend its expectations in areas where significant weaknesses persist. Specifically they intend to include fresh guidance to firms on:
- Providing senior management with sufficient information to understand and effectively manage financial crime risks.
- Factors to be considered when assessing business risks to which they may be exposed.
- Carrying out proportionate and effective business-wide risk assessments.
- Determining the risk associated with individual relationships, with particular emphasis on the need for firms to take a holistic approach to risk assessment.
What does it mean?
The ABC deficiencies highlighted by the Review as being still unsatisfactory are not new. After enforcement action against Aon Ltd in 2009, the 2010 Bribery Act was enacted, there have also been enforcement actions against intermediaries for failings in their ABC systems and controls; Willis Limited in 2011, JLTSL in 2013 and Besso Ltd in 2014. It is surprising and worrying that despite ABC controls being under the spotlight for several years many firms in this sector have not recognized how this applies to their business, and, for others who have, their response is described by the FCA as still being a ‘work in progress’.
Regulated firms have had the benefit of the thematic reviews and the general guidance that the FCA has published. They will find themselves with nowhere to go if intermediaries are caught making illicit payments and the corporate defence under the Bribery Act will be unavailable unless their ABC is up to scratch and their employees and intermediaries are suitably trained and vetted.
Once implemented, the ABC policy needs to be a living document that is reviewed regularly with lessons learned being incorporated into it. Governance and focus in this area needs to be improved. In the future, firms that are found wanting really will have no excuse.