In our last blog post, we predicted a likely up-tick in FCA disciplinary activity in 2018. It seems that we might have been right, as the FCA has already issued fines totalling nearly £2.5 million against fines and individuals in the first few weeks of the New Year. And the insurance industry has not escaped regulatory scrutiny. On 26 January, the FCA announced big fines on broker One Call Insurance Services Limited (“OCISL”) and its CEO / majority shareholder, John Radford (“Mr Radford”) of £684,000 and £468,000 respectively for breaching FCA rules on client money handling. In a rare move, the FCA has also prevented OCISL from charging renewal fees to customers for a period of 121 days, which may cost the firm £4.6 million.
The FCA said that OCISL, in its role as an intermediary (selling motor and household insurance through price comparison websites), received client money under the Client Money Rules, premiums which were then paid on to insurers. But the firm did not have adequate protection for those funds. The FCA said that this was a breach of Principle 10 of the FCA’s Principles for Business and Client Money Rules (firms must arrange adequate protection for any client assets that they are responsible for) because:
- OCISL failed to realise that some of its Terms of Business Agreements “did not provide effective risk transfer” and therefore the firm’s client account was not operated in line with the FCA’s Client Money Rules; and
- From 1 December 2009, the firm “failed to treat funds advanced by a third party premium provider in respect of years two and three of an annual motor policy with a subsequent two-year renewal price guarantee as client money.”
The FCA noted that had OCISL followed good industry practice, its failings in this area might not have been as serious. But OCISL spent money over and above that due to it by way of commission/fees, leading to a deficit in client money (calculated as being in the region of £17.3 million at the time of intervention by the FCA). And the FCA decided that an aggravating factor was that OCISL received warnings from its external auditor in 2012/2013 that it might have been in breach of Client Money Rules.
In keeping with its recent emphasis on senior management responsibility for corporate regulatory misconduct, the FCA fined OCISL’s CEO Mr Radford £468,000 and prohibited him from having responsibility for client or insurer money in respect of any regulated financial services activity. The FCA noted Mr Radford had been responsible for client money at OCISL between 2005 and 2011. This meant that he was the senior manager personally responsible for ensuring that OCISL complied with relevant regulatory requirements.
The FCA said that that Mr Radford (as an FCA authorised Approved Person) had not carried out his responsibilities with due skill, care and diligence in breach of the FCA’s Statement of Principle 6 for Approved Persons. For example, Mr Radford had not investigated the auditor’s warning that OCISL may not have been complying with regulatory requirements in respect of client money.
In addition, the FCA considered that Mr Radford had failed to ensure that the firm had robust systems/controls for assessing whether “effective risk transfer agreements” were in place with insurers – to ensure that insurers would bear the risk of any shortfalls in respect of client money (which highlighted above, became a very real problem for OCISL). The FCA also found that Mr Radford “failed to recognise that money under a multi-year policy should have been treated differently in different years from a client money perspective.”
These failures meant that Mr Radford had failed to ensure that OCISL’s “client money resource was at least equal to its client money requirement” – resulting in a serious deficit. This was in breach of FCA Statement of Principle 7 – failing to take reasonable steps to comply with relevant regulatory requirements/standards.
Clearly, the FCA’s emphasis on the insurance industry understanding the client money regime and following good market practice has not gone away and we can probably expect more regulatory activity in this space. This is not the first time that a broker has been fined for client money failings and insurers have suffered a similar fate in the recent past.
The message here is for all participants in the industry to understand what the regulator requires of them and follow that assiduously. Otherwise, they are asking for trouble.