A GUIDE TO REINSURANCE LAW CHAPTER 8 INTERMEDIARIES

1st Edition, 2007

Chapter 8

INTERMEDIARIES
REGULATION
On 15 January 2005 the Financial Services Authority became the regulatory entity overseeing the activities of insurance agents, as a
result of the Financial Services & Markets Act 2000.
The FSA has four statutory objectives:
(a) to maintain market confidence in the financial system;
(b) to increase public awareness;
(c) to ensure consumer protection; and
(d) to prevent and reduce financial crime.
The FSA has eleven Core Principles for Business with which authorised entities should comply:
1. A firm must conduct its business with integrity.
2. A firm must conduct its business with due skill, care and diligence.
3. A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk
management systems.
4. A firm must maintain adequate financial resources.
5. A firm must observe proper standards of market conduct.
6. A firm must pay due regard to the interests of its customers and treat them fairly.
7. A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is
clear, fair and not misleading.
8. A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another
client.
9. A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is
entitled to rely upon its judgment.
10. A firm must arrange adequate protection for clients assets when it is responsible for them.
11. A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything
relating to the firm of which the FSA would reasonably expect notice.
The FSA also has certain Threshold Conditions which must be met by an agent, as follows:

Threshold Condition 1Legal Status

If the regulated activity is effecting or carrying out contracts of insurance, the firm must be an incorporated firm (but not a limited
liability partnership), a registered friendly society or a member of Lloyds.

Threshold Condition 2Location of offices

A regulated UK firm must have its head office and registered office in the UK or (if not a body corporate) carry on business in the
UK.

Threshold Condition 3Close links

The FSA must be satisfied that it can effectively supervise a firm, taking into account the structure of the group to which it belongs or
the other firms to which it has close links.

Threshold Condition 4Adequate resources

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The FSA must be satisfied that the firm has adequate resources. Adequacy of resources is not just about financial resources. The FSA
also looks at whether the firm has adequate management and staff, both in terms of quantity and quality.

Threshold Condition 5Suitability

The FSA must be satisfied that the firm is fit and proper to be authorised. In assessing this, the FSA looks at the competence and
ability of management, as well as its commitment to carrying on the business with integrity and in compliance with the regulatory
regime.
The Act is intended to coordinate and modernise financial regulatory arrangements which were established under a number of
different enactments including the Insurance Companies Act 1982, Insurance Brokers (Registration) Act 1977 and the Financial
Services Act 1986. These Acts are generally supplemented by secondary legislation and rules but have now been repealed and
replaced by the FSMA. The FSMA is in essence a framework to enable appropriate legislation to come into force after detailed
consultation with the appropriate markets.

Robert Merkin

A GUIDE TO REINSURANCE LAW CHAPTER 8 INTERMEDIARIES

1st Edition, 2007

In December 2001 it was decided that the FSA would regulate the sale and administration of general insurance contracts. The FSA
subsequently produced several Consultation Papers as part of its due process, with the intention of liaising with the relevant markets
in order to produce a set of rules that reflected not only the standards and practices of those markets but also to provide either a better
deal or greater certainty for the consumer of insurance and reinsurance products. Following receipt and consideration of all responses
the FSA has produced an appropriate set of rules. The predominant rule book for matters of insurance is entitled Insurance: Conduct
of Business Source Book (abbreviated to ICOB), set out in seven sections and directing the user to the appropriate sections of other
rule books where appropriate. ICOB implements various provisions contained in the IMD, the Distance Mediation Directive, the
Consolidated Life Directive, the Third Non-Life Directive and the Fourth Motor Insurance Directive. ICOB applies to any insurance
intermediary, which is defined as a firm carrying on an insurance mediation activity, i.e. one which deals with the regulated activities
specified in the Regulated Activities Order and includes those parties assisting in the administration and performance of a contract of
insurance. ICOB does not apply to reinsurance contracts but it does apply to agents carrying out reinsurance mediation activities.
In addition other requirements may need to be discharged, including, for example, those in the Training and Competence
Sourcebook, to the effect that its employees are competent; that its employees remain competent for the work they do; that its
employees are appropriately supervised; that its employees competence is regularly reviewed; and that the level of competence is
appropriate to the nature of the business.
The beauty of the system from the FSAs point of view is that if it considers that a broker is doing something which the FSA feels
it should not be doing, but that activity does not fall squarely as a breach of a specific regulation, it may be able to call upon the Core
Principles to discipline the broker.

Intermediation: broking harmony throughout Europe

The Insurance Mediation Directive replaces a 1977 Directive and on implementation in January 2005 became the only binding EU
law covering individuals or companies selling insurance products on behalf of others. On compliance with the Directive
intermediaries are free to sell their services anywhere in the EU. The Directive applies to all brokers and tied agents carrying on
insurance mediation which is defined as the activities of introducing, proposing or carrying out other work preparatory to the
conclusion of contracts of insurance and reinsurance, or of concluding such contracts, or of assisting in the administration and
performance of such contracts, in particular in the event of a claim. The Directive therefore applies to the activities of both
producing and placing brokers carrying on either insurance or reinsurance business. Each Member State has to take all necessary
action to ensure that insurers only use the insurance mediation services of registered brokers. The Directive requires that all
individuals or companies who carry out insurance or reinsurance mediation must be registered with the competent authority in their
home Member State (in England the FSA) on the basis of the following minimum requirements:
possession of appropriate general, commercial and professional knowledge and ability, as determined by the home member
state of the intermediary;
being of good repute;
possession of professional indemnity insurance or any other comparable guarantee against liability arising out of professional
negligence;
sufficient financial capacity to protect customers against any failure by the intermediary to transfer customers premiums to
insurance companies or to pass on to customers money received for claims under the policies they hold.
Once registered with the FSA, the broker will then be entitled to operate anywhere in the EU by notifying the FSA of the other
Member States in which it intends to carry on business. The FSA will then notify the competent authorities of those other Member
States and one month after the FSA has told the broker that such notice has been provided, the broker can operate in those Member
States.

TEST YOUR UNDERSTANDING

(1) Does it matter to the enforceability of a contract by the reinsurer that the reinsured limited the actual authority of his broker in a
material way?
(2) Is the broker usually the agent of both reinsured and reinsurer?

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(3) What is the effect of the liquidation of the reinsured on a reinsurance contract concluded after that liquidation, and are there any
remedies available to the reinsurer against the reinsured or its broker?
(4) Does the ratification by the reinsured of the contract placed by the broker in excess of his authority automatically exonerate the
broker from acting unlawfully?
(5) What is an agent to insure?
(6) Can a broker ever be liable for non-disclosure or misrepresentation to the reinsurer?
(7) Would a material fact of the reinsured known by the postboy of the broker be attributed to the reinsured and therefore be
disclosable to the reinsurer?
(8) Does the fraud of the broker upon the reinsured, which impacts on the reinsurance, have any effect on the validity of the
reinsurance?

Robert Merkin

A GUIDE TO REINSURANCE LAW CHAPTER 8 INTERMEDIARIES

1st Edition, 2007

(9) What steps should a broker take to ensure that he is not responsible for the collection of claims many years after placement?
(10) What should a broker do when faced with an ambiguity in his instructions?
(11) Should a broker accept his instructions at face value or should he check that they reflect the actual needs of the reinsured?
(12) Should a broker convey to the reinsured every doubt that he may have about the intended security of the reinsurer, or should
he make an overall decision as to its solvency?
(13) How much reinsurance law should a broker know?
(14) For what purpose does a broker receive payment, and from whom?

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(15) What is the maximum period within which legal proceedings should be commenced for a broker who has failed to pass on all
material information, which has resulted in avoidance of the contract by the reinsurer?

Robert Merkin