£15.5m penalties for PII that put 1,300 law firms at risk

Topics: Insurance,PII

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Financial regulators have fined five individuals a total of £15.5m for their part in unauthorised solicitors’ professional indemnity insurance schemes.

An investigation by the Financial Conduct Authority in July 2013 found the schemes raised questions about the validity of insurance arrangements for more than 1,300 solicitors firms across England and Wales.


Three insurers went into administration as a result, and the risk increased that policyholders’ claims would not be paid.

The FCA said the insurance schemes in question were all linked to Shay Reches, a director with insurance intermediary Coverall Worldwide Limited with responsibility for a managing general agent, Aderia UK Limited.

Reches used binding authorities issued by London-based Aderia to various cover-holders, including to a specialist PII broker, Bar, which targeted solicitors.

Security was needed from a number of insurers and reinsurers based in the UK, the rest of Europe and offshore. The principal risk carrier, Sinclair Insurance Company, was registered in the Comoros and owned and controlled by Reches.

The FCA said failings in the management oversight throughout these distribution chains, and the failure of the reinsurance arrangements, contributed to three insurers – Millburn, European Risk Insurance Company and Latvian insurer Balva – all entering administration.

As a result, each was unable to honour the insurance they had offered to hundreds of law firms.

The FCA said a wider review of the systems revealed a lack of due diligence when selecting potential insurance and reinsurance security, poor understanding and scrutiny of appointed representatives, a lack of understanding about client money rules and a lack of adequate systems and controls for protecting client money.

Reches was fined £1.05m and has agreed to pay £13.13m to the three insurers that went into administration. The FCA said it was the first time it has fined a person for undertaking regulated activities without approval. Reches was also banned from any FCA-regulated activity in future.

Colin McIntosh, chief executive at Millburn and a director at Coverall, was fined £51,600 and had his FCA approval withdrawn.

Millburn has been declared in default by the Financial Services Compensation Service and was fined £1,137,500 for failing to deal with the FCA in an open and cooperative way.

Coverall was fined £36,800 and had its authorisation cancelled. Its director, Robert Bygrave, was fined £37,400 and banned from taking a similar position again. Fellow director Andrea Sadler was also banned and fined £18,700.

Bar, which is now in liquidation, was publicly censured by the FCA and 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’.

Its director and controller Wayne Redgrave was fined £38,600 by the FCA.

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 said. ‘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.

‘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.’

Readers' comments (9)

  • Here we go again...The disaster that is PII that simply will not go away and NOBODY has the solution.

    The biggest barrier to entry and exit.

    What a mess. Oh for a bloody mutual...

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  • do law firms who had had to deal with shock get compensated for almost having a heart attack??

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  • Excellent! Can't wait to hear when all the fines have been paid in full.

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  • This ought to trigger moves to increase regulation of insurers in the same way that the so called bad apples in the pi industry have been used as the scape goat for attacks on that industry. But of course it wont.

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  • What no mention of those other "brokers" who conducted equally robust due diligence of these self same Insurers and pocketed millions in commissions for selling policies arranged by these fellows where they all knew were unlikely to pay claims?
    Don't worry about the policy, think of the commission!
    The Engineer of the GWR is spinning in his grave.

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  • The very tip of some very many bigger icebergs of other regulator's issues crossing into SRA regulated matters?

    Just like the SRA! They state get PII covered or else, so cover was got, but wow, what wasn't ever covered?

    Same arriving as the FCA confirms none within the SRA had correctly been understanding HAndbook sections regarding dualities of authorisations needed.

    Now more claims not covered by PII?

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  • Without s.39 SA 1974 no one would be in this mrs. And who was responsible for that? What was wrong with simply requiring all firms to be covered by a responsible, respectable insurer, but you find your own cover and just produce a Certificate of Insurance when you apply for your PC?

    And I like the idea of a mutual, Anon12.34, but how would, or even could, the pitfalls that befell SIF be avoided do you suggest?

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  • I'd bet that none of the fines will be paid. Has immediate enforcement action been taken?

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  • The FCA report makes extraordinary reading. This is a major scandal.

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