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Colin McIntosh, chief executive at Millburn and a director at Coverall, was fined £51,600 and had his FCA approval withdrawn.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