UK: Financial Services & Insurance - Insurance Regulation

This article sets out the current regulatory position of participants in the UK general insurance market, and explains how that is about to change. It does not deal with the position of those involved in the life insurance market, which is in some respects different.

Under the Financial Services and Markets Act 2000 ("FSMA"), the activities of "effecting" and "carrying out" contracts of insurance as a principal in the UK by way of business are regulated activities. These activities include (but are not limited to) the underwriting of insurance and the payment of claims. It is a criminal offence to carry on those activities without authorisation from the Financial Services Authority, subject to certain exemptions and exclusions. Unauthorised insurance contracts are also, generally, unenforceable by the "insurer".

What constitutes a "contract of insurance" is not defined by statute and it is necessary to look to the common law. The FSA has recently issued guidance on this issue, but the guidance merely analyses the common law position. Broadly, a contract of insurance may be defined as an arrangement whereby one party (the "insurer") will pay money to, or confer some other benefit on, another (the "insured") on the occurrence of an uncertain event, in return for the payment of a consideration (usually referred to as a "premium"). It involves the transfer of risk from the insured to the insurer. It is worth noting that it is possible for parties to be involved in commercial arrangements (e.g. in relation to extended warranties or guarantees) which, inadvertently, constitute insurance business. It is therefore essential to scrutinise any arrangements which appear to bear the characteristics set out above to make sure they do not actually constitute unauthorised insurance business.

Where the FSA grants authorisation to a company (an "authorised person") to carry on insurance business, it will specify the classes of business which may be carried on by the company e.g. accident, damage to property, motor vehicle liability, credit.

The FSA's supervision of insurers is currently largely "prudential"; that is, it is concerned with ensuring the financial soundness of insurers rather than, generally, with imposing standards in relation to the way products are sold or the insurers' dealings with customers. The sale of insurance products and dealings with customers are currently dealt with by voluntary regulation if the insurer has chosen to join the General Insurance Standards Council ("GISC"). In fact, virtually all UK insurers are members of GISC. However, all this is about to change.

On 14 January 2005 the FSA's role will expand as it becomes the statutory regulator in relation to insurance sales. When the changes take effect GISC will cease to function and insurers will become subject to direct regulation by the FSA in relation to policy sales and dealings with customers, as well as prudential matters: see further under "Intermediaries" below. It should be noted that certain (but not all) extended warranty and travel insurance products will be excluded from the new regime in relation to sales, though not in relation to underwriting, which will still require authorisation.

The FSA has considerable powers of investigation and discipline over authorised persons. It also operates the "approved persons" regime, whereby individuals appointed by an authorised person to carry out certain specified functions must be approved, in advance of taking up those functions, by the FSA. Approved persons are required to subscribe to a number of standards, breach of which exposes him or her to discipline by the FSA in a personal capacity. Intermediaries

Currently there is no statutory regulation of insurance intermediaries (whether acting as traditional insurance brokers on behalf of insured parties, or selling policies, handling claims or carrying out other functions on behalf of insurers). Intermediaries carrying out such functions are not caught by the current FSA regime because they are not effecting or carrying out insurance contracts "as principal".

Many insurance intermediaries are members of GISC. As discussed above in relation to insurers, this imposes standards in relation to policy sales and claims handling and additionally, it imposes certain financial requirements on its intermediary members.

The main thrust of the forthcoming regulatory changes in January 2005 is to bring insurance intermediaries within the statutory regime under the supervision of the FSA. The changes have been brought about by an EC Directive requiring Member States to regulate insurance intermediaries. The activities of most intermediaries will therefore become subject to compulsory statutory regulation for the first time covering all aspects of their business, unless another regulated entity is prepared to register them as an "appointed representative" and accept regulatory responsibility for their activities, or they are otherwise exempt. It will be a criminal offence to carry on the activities of an insurance intermediary without FSA authorisation, appointed representative status or the benefit of another exemption.

The activities of intermediaries will become regulated if they constitute any of the following:

1. Dealing in contracts of insurance as agent. This activity is defined in terms, of buying, selling, subscribing for or underwriting contracts as agent, whether for insured or insurer.
2. Arranging (bringing about) deals in contracts of insurance.
3. Making arrangements with a view to transactions in contracts of insurance. Note that this activity is wide enough to encompass the activities of most "introducers".
4. Assisting in the administration and performance of a contract of insurance. This activity relates, in broad terms, to activities carried on by intermediaries after the conclusion of a contract of insurance, for and on behalf of policyholders, in particular in the event of a claim. For example, loss assessors acting on behalf of policyholders are likely to be carrying on this activity.
5. Advising on contracts of insurance.
6. Agreeing to carry on any of the above activities.

Various exclusions apply and certain types of person are exempt from the requirement for authorisation. However, the new regulated activities are such as to encompass the activities of many businesses and other entities whose activities do not primarily relate to insurance. For example, retailers, charities, property managers and other professionals may all be caught if they are involved in introducing customers to insurance providers, or are otherwise involved in the promotion or arranging of insurance. Even intra-group arrangements may be caught in some circumstances. FSA research shows that recognition of this issue is far from universal among the "secondary" insurance market.

If they are carrying on the regulated activities, the intermediaries will be subject to new FSA rules about the way they deal with customers. These rules apply equally to insurers in so far as they are carrying on the customer-facing activities. For example, there are rules as to status disclosure by the intermediary, product disclosure and claims handling and in certain circumstances the customer is given a right to cancel policies after purchase.

Participants at Lloyd's are in a special position at present, as (following the coming into effect of FSMA) Lloyd's retains some residual regulatory functions in tandem with the FSA.

Lloyd's members ("names") are not subject to the requirement for authorisation for their underwriting activities. The managing agents who underwrite risks on their behalf are, however, subject to a requirement for FSA authorisation for their own activities, as are the members' agents who advise names on their syndicate involvement.

Managing agents will, from 14 January 2005, be subject to the new FSA rules on insurance sales.

Insurance brokers who wish to place business at Lloyd's are required to be accredited by Lloyd's. The current accreditation requirements specify that the broker must be a member of GISC and satisfy certain additional qualifications. From January 2005 Lloyd's brokers will continue to be required to satisfy certain additional qualifications as well as obtain statutory authorisation as intermediaries.