Antoinette Jucker - Next year, draconian regulations are going to be imposed on any firm that so much as thinks about arranging insurance. Here’s how the system will work
FROM JANUARY 2005, NEW REGULATIONS WILL extend the heavily regulated financial services regime to any business that purchases or arranges insurance for another, or assists another in the preparation of an insurance claim.
The following are examples of activities that will technically fall within the new regulations:
- Contractors who obtain insurance on behalf of, or handle claims for, other parties – for instance, developers or funders
- Employers who obtain project insurance on behalf of other parties involved with the project
- Anyone arranging insurance for joint ventures
- Group risk management companies.
In fact, all “insurance mediation” activities will become regulated financial activities in the UK from early next year. More general examples include arranging and/or advising on insurance contracts, and “assisting in the administration and performance” of insurance contracts.
This latest extension to the financial services regime has led to a scramble by businesses and their professional bodies to work out whether it will apply to them and/or their members; to seek clarification from the Financial Services Authority and the Treasury and, in many cases, to apply for FSA authorisation so that they can continue to provide “insurance mediation” services after the 14 January deadline.
It will be a criminal offence to carry out any “insurance mediation” activity without FSA authorisation, even if the business concerned is contractually obliged to provide these services.
There are, however, some limitations to the scope of the regime. There may also be applicable exemptions or exclusions that a business engaging in “insurance mediation” services after 14 January 2005 could make use of.
One key limitation is that the business providing “insurance mediation” needs to receive “remuneration” for doing so, although this does not necessarily mean a “profit”. Remuneration would include, for example, commission from a broker or a discount on the premium paid. Another limitation is that there needs to be a degree of regularity in the activity concerned, although this does not necessarily mean that the services have to be provided frequently.
The exemption most likely to be appropriate for a business providing “insurance mediation” will be to become an appointed representative of a “principal” – that is, a business already authorised by the FSA such as an insurance company.
For a business, the advantages of becoming an appointed representative rather than seeking authorisation in its own right include not having to comply with minimum capital maintenance and professional indemnity insurance requirements. Neither will it have to pay the FSA’s application and annual fees, which are not inconsiderable.
On the other hand, because of the services it is providing and the risks involved, the principal is likely to impose systems, controls and checks on an appointed representative that are at least as stringent as those imposed by the FSA. Also, certain members of its staff will have to be vetted and trained to the required standard by the principal. From a commercial aspect, the principal may charge an appointed representative or offer it less attractive commercial terms, such as less commission. It may also impose restrictions such as stopping an appointed representative from selling other insurers’ policies.
There is, however, a strong possibility that group risk managers and joint venture participants may escape this extension to the financial services regulatory regime. This is because the FSA has recently indicated (FSA Update 15 September 2004) that, in its view, a group company that provides “insurance mediation” services solely to other members of the group and which receives no other remuneration is not providing “insurance mediation” services within the meaning of the regulations. It extended this analysis to risk management services provided by a participant in a joint venture to another participant in the same venture.
However, the FSA has made it clear that whether authorisation is required in any particular situation will depend on circumstances, and so specific advice should be taken before a business relies on this apparent safe harbour.
Antoinette Jucker is a partner at Masons. The article was co-authored with senior associate Nicola Marrin