UK: Retailers Beware: FSA Targets Illegal Insurance Brokers

Since 14 January 2005 (known as ‘N(GI)’) it has been a criminal offence (punishable by up to 2 years imprisonment and/or a fine) to carry on certain activities in relation to general insurance activities unless authorised by the FSA to do so or otherwise exempt. This includes advising on, selling and arranging insurance policies as well as certain administrative functions. It is also an offence for someone to falsely claim to be authorised or exempt, or to behave in a manner that indicates, or which is reasonably likely to be understood as indicating this. This ‘holding out’ offence is punishable by 6 months imprisonment and/or a fine.

Particularly under the FSA's spotlight are those retailers who should have become authorised by the FSA on N(GI) (because, for example, they sold insurance or referred customers to insurers as a sideline to their main business) but for whatever reason failed to do so.

The FSA has recently visited over 500 firms in the Midlands to establish whether or not they are in fact conducting unauthorised general insurance business. Firms elsewhere in the UK can expect visits soon. The FSA is targeting not only primary intermediaries (brokers who sell insurance as their main business) but also secondary intermediaries (firms who sell insurance as a secondary activity to their main business). Within the secondary market, the FSA has initially concentrated on motor dealers, property managers, travel agents, high value retail outlets and removal and storage firms but other businesses can expect to be targeted shortly. The FSA says that it is acting on a number of leads, including its own database of firms that registered or applied for authorisation prior to N(GI) but later withdrew, and also information given to it by the industry and the public.

Companies should be aware that the FSA has very broad powers of investigation in cases where it suspects that unauthorised business is being carried on. For example, it can compel people to give evidence in an interview and to provide relevant documents in support of its fact-finding mission. Failure to comply with the requirements of an FSA investigator is itself an offence and punishable as a contempt of Court. The FSA can then take legal action against those people who are carrying out unauthorised business. In such cases it will act quickly and with little warning to the offender. It is also likely to publicise its investigations and any consequent legal proceedings so as to protect customers from dealing with unauthorised firms. As well as the criminal sanctions referred to above, the FSA can apply to the Court for an injunction to restrain such breaches and/or to freeze offenders' assets. It can bring insolvency (winding up a company or making an administration order) or bankruptcy proceedings (against individuals). Any transactions entered into in breach of the general prohibition will be unenforceable.

And the FSA has already shown its teeth. Earlier this year, it successfully petitioned for the winding up, on public interest grounds, of the insurance intermediaries, Whiteley Insurance Consultants. The FSA argued that Whiteley was putting consumers at risk by effecting insurance contracts as principal without authorisation prior to N(GI) and was in breach of its permission after N(GI) by selling insurance polices that were not underwritten by an authorised insurer.

At the same time the FSA has said that it will not put people out of business unnecessarily. Where breaches are inadvertent, or result from a genuine misunderstanding, options will include applying to obtain proper authorisation. But where those breaches are deliberate or reckless the FSA will not hesitate to use the full powers available to it to deal with offenders.

In the light of the crackdown, those retailers with a sideline in insurance who, for whatever reason, did not apply for FSA authorisation, would be well advised to double check that the reasons why they did not do so in the first place still remain valid (and, for example, that a new part of their business does not now mean that FSA authorisation is required). Otherwise the unpalatable alternative is to face the consequences and the draconian penalties, as well as the damaging adverse publicity.