The Financial Conduct Authority (FCA) has fined five individuals and two firms a total of £15.5m, in addition to banning four of those individuals, for significant integrity and competence failings.
The FCA found that Shay Reches performed the CF1 (Director (AR)) controlled function at Coverall Worldwide Limited (Coverall), with responsibility for a managing general agent, Aderia UK Limited (Aderia), and conducted regulated activities, which were central to setting up and operating these insurance schemes, despite not being approved by the FCA to do so. In doing so, Mr Reches recklessly directed payments of insurance premiums to parties other than the insurers and reinsurers responsible for paying claims, increasing the risk that policyholders’ claims would not be paid.
This misconduct contributed to the failure of several insurance schemes as well as to three insurers going into administration. As a result, the Financial Services Compensation Scheme (the FSCS) has had to pay substantial claims, totalling £12.7m as at the end of 2015.
The FCA has fined Mr Reches £1,050,000. Mr Reches has also agreed to pay a sum of £13,130,000 to the three insurers, which will make a substantial contribution towards the liabilities to the FSCS and UK policyholders. If he fails to pay this amount or any part of it, the fine will be increased by the amount unpaid. These payments to insurers will deprive Mr Reches of the indirect benefit that the FCA considers he has gained from his misconduct. Mr Reches has also been prohibited by the FCA from performing any function in relation to any regulated activity.
Action was also taken against Colin McIntosh, Millburn Insurance Company Limited (Millburn), Coverall, Robert Bygrave, Andrea Sadler, Wayne Redgrave and Bar Professions Limited (Bar).
These actions were taken as a result of a joint investigation by the FCA and the Prudential Regulation Authority (PRA). The PRA will also be publishing Final Notices against Colin McIntosh and Millburn today.
Mark Steward, director of enforcement and market oversight, said:
"This was a hugely complex case with the FCA liaising with over 20 regulators and agencies around the world.
"Mr Reches’ misconduct led to many solicitors and others being left without adequate insurance. He treated policyholders’ funds and their interests with reckless indifference and his misconduct was facilitated by an absence of proper controls by key persons at important stages of the insurance process. The FCA has also taken action against those responsible for poor controls and oversight.
"This case not only demonstrates the consequences of poor controls but also what can happen when the distribution chain becomes overly complex, participants fail to ask obvious questions or take rudimentary precautions, including those insurance intermediaries and brokers checking whether Mr Reches was approved to carry out the functions he was performing."
The investigations followed early intervention action taken jointly by the FCA and PRA between July and September 2013 following concerns raised about the validity of solicitors’ professional indemnity insurance (Solicitors’ PII) arranged for over 1,300 solicitors’ firms across England and Wales. Without such insurance solicitors are unable to carry on business. As a result of that early intervention action, the regulated activities of the various entities were halted and client money had to be ring fenced.
The insurance schemes that caused concern, and are the subject of today’s action, were all linked to Mr Reches. These schemes used binding authorities issued by a London-based managing general agent, Aderia, to various coverholders, including to specialist insurance broker, Bar, which sold Solicitors’ PII. Aderia was an appointed representative of a UK insurer, Millburn, and a UK insurance intermediary, Coverall.
For this complex system to work, security needed to be available from a number of insurers and reinsurers based in the UK, Europe and offshore. The principal risk carrier, Sinclair Insurance Company Limited (Sinclair), is registered in the Union of the Comoros and owned and controlled by Mr Reches.
The failings in the management oversight throughout these distribution chains and the failure of the reinsurance arrangements contributed to three of the insurers - Millburn, European Risk Insurance Company (ERIC) an Icelandic insurer, and Balva Insurance Company AAS (Balva) a Latvian insurer - going into administration, in part due to debts owed by Sinclair. As a result, they were unable to honour the insurance they had ultimately offered, through coverholders to solicitor customers and other policyholders, which risked those customers being left uninsured.
Wider significance of outcomes
These outcomes highlight a number of wider concerns identified in our supervisory and thematic work, in particular the findings of our thematic review TR15/7 Delegated Authority: outsourcing in the general insurance market, including:
- the 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
- the need for clarity and certainty about roles and responsibilities
- the responsibilities of intermediaries used in the distribution chain
- the lack of understanding and correct application of the client money rules; and
- the lack of adequate systems and controls in ensuring client money is protected.
Details of the sanctions imposed
Shay Reches - an unapproved person, has been fined £1,050,000. In addition, Mr Reches has proposed to pay £13,130,000 to the three insurers (Milburn, ERIC and Balva) that have been declared in default by the FSCS. Should Mr Reches fail to pay any of this sum, the outstanding amount will be payable to the FCA as an additional fine. Mr Reches has also been prohibited by the FCA from performing any function in relation to any regulated activity.
Mr Reches was central to the establishment and operation of the failed insurance schemes and the FCA considers that Mr Reches displayed a serious lack of integrity in that he recklessly disregarded the risk that directing payments of insurance premiums to parties other than the insurers and reinsurers responsible for paying claims could result in those insurers and reinsurers being unable to pay claims. Mr Reches, by setting up and running the insurance schemes, performed the FCA controlled function of director at an authorised firm (Coverall), with responsibility for its appointed representative, Aderia, without regulatory approval. The sanction is noteworthy as it is the first time that the FCA has fined a person for undertaking FCA regulated activities without approval.
Colin McIntosh - the chief executive at Millburn and a director at Coverall, has been fined £51,600 by the FCA. Mr McIntosh has also had his FCA approval withdrawn, and been prohibited from performing any FCA controlled functions.
Mr McIntosh failed to deal with the FCA in an open and cooperative way in his role at Millburn, and failed to take reasonable steps to ensure that the business of Coverall complied with the relevant requirements and standards of the regulatory system. Mr McIntosh demonstrated a lack of integrity because he failed to mitigate the risks to potential Solicitors’ PII policyholders from contracts entered into by Aderia.
Millburn - a UK insurance company, which is now in administration, has been declared in default by the FSCS. The FCA fined Millburn £1,137,500 for failing to deal with the FCA in an open and cooperative way and disclose appropriately information in relation to Millburn of which the FCA would reasonably expect notice. This was in respect of Millburn’s responses to the FCA’s requests for information about a reinsurance treaty which it had seemingly entered into with Balva, the scope of which was outside of Millburn’s permission. As Milburn is in administration, the FCA will become a creditor of the firm. However, policyholder financial claims against Milburn will be given precedence over the FCA’s fine.
Coverall - a UK insurance intermediary, has been fined £36,800 by the FCA, and had its authorisation cancelled. Coverall has been sanctioned for recklessly failing to mitigate the risks to policyholders arising from the contracts entered into by its appointed representative, Aderia. It also failed to take reasonable care to ensure that it established and implemented adequate controls over its appointed representative, and failed to arrange adequate protection for client money.
Robert Bygrave - held the FCA director function at Coverall with responsibility for managing Aderia’s finances. He has been fined £37,400 by the FCA and prohibited from undertaking any FCA significant influence functions. Mr Bygrave has been sanctioned for not appropriately managing the business for which he was responsible as director, in that he failed to take reasonable steps to adequately inform himself about the way insurance premiums received as client money should be treated. He also allowed premiums to be paid to third parties as instructed by Mr Reches, an unapproved person, rather than to the insurer.
Andrea Sadler - held the FCA director function at Coverall with responsibility for managing Aderia’s day-to day operations. She has been fined £18,700 by the FCA and prohibited from undertaking any FCA significant influence functions. Mrs Sadler has been sanctioned for not appropriately managing the business for which she was responsible as director. Mrs Sadler failed to ensure that appropriate contractual arrangements were in place for insurance cover to be provided before signing agreements committing Aderia and insurers to offer that insurance cover. She also failed to put in place appropriate systems and controls to prevent Mr Reches from giving her instructions in relation to the regulated business and allowing him to take lead roles in key negotiations and materially influencing business operations.
Bar - a specialist London based insurance broker predominantly providing Solicitors’ PII (it is now in liquidation), has been publicly censured by the FCA. Bar has been sanctioned for negligently failing to conduct adequate due diligence concerning insurance arrangements for policyholders and sending a letter to over 1,300 customers inducing them to enter into contracts of insurance on the basis of materially inaccurate and misleading information.
Wayne Redgrave - an experienced broker, a director and the controller at Bar, has been fined £38,600 by the FCA. Mr Redgrave has been sanctioned for being personally responsible as director and the main decision maker at Bar for its above failings, including that he drafted and signed the letter, which was sent to over 1,300 of Bar’s solicitor customers.
Notes to Editors
- Final Notice for Shay Reches.
- Final notice for Colin McIntosh.
- Final notice for Robert Bygrave.
- Final Notice for Andrea Sadler.
- Final Notice for Wayne Redgrave.
- Final Notice for Millburn Insurance Company Limited (Millburn).
- Final Notice for Coverall Worldwide Limited (Coverall).
- Final Notice for Bar Professions Limited (Bar).
- Sinclair Insurance Company Limited is now known as Klapton Insurance Company Limited.
- Aderia UK Limited is now known as II&B UK Limited.
- Thematic Review 15/7: delegated authority: Outsourcing in the general insurance market.
- On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.