FCA fines a person performing controlled functions without approval for the first timePrint publication
The Financial Conduct Authority (the FCA) has fined five individuals and two firms a total of £15.5 million, and banned four of the individuals, in relation to solicitors’ professional indemnity insurance (Solicitors’ PII) and other insurance scheme failures. The enforcement action taken against one of the individuals, Mr Shay Reches (Mr Reches), marks the first time the FCA has fined a person for performing controlled functions without approval.
In July and September 2013, following concerns raised about the validity of Solicitors’ PII arranged for over 1,300 solicitors’ firms across England and Wales, the FCA and the Prudential Regulatory Authority (PRA) took joint early intervention action to halt the regulated activities of various entities and ring fence client money. The regulators subsequently investigated the firms and individuals concerned, and issued final notices concerning the relevant parties on 1 February 2016.
The insurance schemes that caused concern were all linked to Mr Reches. These schemes used binding authority agreements entered into by Aderia UK Limited (Aderia), a London-based managing agent, and various coverholders, including Bar Professions Limited (Bar), to sell Solicitors’ PII. Aderia was an appointed representative of Millburn Insurance Company Limited (Millburn), a UK insurer, and Coverall Worldwide Limited (Coverall), a UK insurance intermediary.
In order for the schemes to work, security needed to be available from a number of insurers and reinsurers. The principal risk carrier for the Solicitors’ PII policies was Sinclair Insurance Company Limited (Sinclair), a company registered in the Union of the Comoros and owned and controlled by Mr Reches.
The failings of a number of firms and individuals throughout the distribution chain and the failure of the reinsurance arrangements resulted in insurance claims not being paid because insurers had insufficient capital resources. These failings, along with debts owed to numerous insurers by Sinclair in relation to unpaid premiums, contributed to three of the insurers in the schemes, including Millburn, entering into administration.
The FCA found that Mr Reches, in his position in Coverall, had responsibility for a managing agent (Aderia) and conducted regulated activities, which were central to the setting up and operation of insurance schemes relating to Solicitors’ PII. As such, Mr Reches had performed the CF1 (Director (AR)) controlled function despite him not being approved to do so. The FCA found that, while exercising these functions, Mr Reches recklessly directed payments of insurance premiums to parties other than the insurers and reinsurers responsible for paying the Solictiors’ PII claims, increasing the risk that claims would not be paid.
This misconduct contributed to the failure of several insurance schemes. As a result, the Financial Services Compensation Scheme (the FSCS) has had to cover a number of substantial claims, totalling £12.7 million as at the end of 2015.
In light of these actions, the FCA fined Mr Reches £1,050,000. Mr Reches has also agreed to pay a sum of £13,130,000 to the three insurers in administration. This will make a considerable contribution towards those companies’ liabilities to the FSCS and to their UK policyholders. Should Mr Reches fail to pay any of the money due to the three insurers, the FCA’s fine will be increased to cover the amount unpaid. The penalty is intended to ensure that Mr Reches is deprived of any benefit he gained from his misconduct. In addition, Mr Reches has been prohibited from performing any function in relation to any regulated activity.
Action was also taken against Robert Bygrave, Colin McIntosh, Wayne Redgrave, Andrew Sadler, Bar and Millburn. The PRA has also issued final notices against Colin McIntosh and Millburn.
The final notices, in particular the fines levied against Mr Reches which are the first against an individual performing controlled functions without approval, reflect not only the FCA’s ongoing interest in regulated activities undertaken by unauthorised firms, but also in the roles and responsibilities of individuals in the regulatory chain.
The FCA has consistently talked about holding senior people responsible for misconduct taking place in financial institutions, with little consequence. The fact that no fines were imposed against senior figures at either HBOS or the Co-operative Bank, despite the occurrence of serious management failures has been criticised in Parliament and the press. However, the landmark fines imposed on Mr Reches indicate that the FCA is now ready to put its words into action.