Should you be registered?

Marjorie Holmes, partner at Davies Arnold Cooper, outlines the implications of the UK’s new insurance regulations, which came into effect in January 2005.

UNTIL now, many shipping lines will not have thought of themselves as carrying on insurance mediation work of a type which could be regulated. It may well be that some are not caught by the regulations, but what about those who are, for example those who organise a small amount of insurance cover for consignees or ferry passengers?

From January 14, 2005, no person should carry on a regulated activity in the UK unless he or she is an authorised person or an exempt person. To do otherwise could result in a fine or imprisonment, or both.

The scope of the Financial Services and Markets Act 2000 was extended by virtue of the Regulated Activities Amendment Order 2003 to cover general insurance, including insurance mediation. The change to include the sale of general insurance products within the statutory framework was prompted by the Insurance Mediation Directive (IMD) from the European Union.

The Regulated Activities Order describes the types of activities which are regulated. They include;

• Dealing in contracts of insurance as agent.
• Arranging (bringing about) deals in insurance contracts.
• Making arrangements with a view to dealing in insurance contracts.
• Advising a person on insurance contracts.
• Assisting in the administration and performance of a contract of insurance.
• Agreeing to carry on a regulated activity of the kind specified.

It should be noted that each of these activities is subject to exclusions.

For an activity to be a regulated activity it must be carried on ‘by way of Business’ (s 22(1) FSMA). A key element in this is whether the person
receives ‘remuneration’ for the activity. Remuneration includes both monetary and non-monetary rewards and it does not have to be provided separately from remuneration for other services provided.

A person takes up or pursues insurance mediation activity by way of business if he or she carries on those activities regularly and for commercial purposes. For example, the business test would be likely to be satisfied where a person recommends a specific insurance policy in the course of carrying on a business and receives a fee or commission for the referral.

The IMD definition of an insurance intermediary is “any natural or legal person who for remuneration takes up or pursues insurance mediation”.
Article 3(4) of the By Way of Business Order 2001 states that “a person is not to be regarded as carrying on by way of business any insurance mediation activity unless he takes up or pursues that activity for remuneration”. A literal reading of these provisions would have resulted in the regulation of many more companies than the IMD could have contemplated.

The Financial Services Authority (FSA) has acknowledged that some companies carry on insurance mediation exclusively for other companies within the same group. In the case of group risk managers, the FSA has looked to Recital 11 of the IMD which states that “the Directive should apply to persons whose activity consists in providing insurance mediation services to third parties for remuneration, which may be pecuniary or take some other form of agreed economic benefit tied to performance.” The FSA has sensibly concluded that the relationship between group companies is not a ‘third party’ relationship. As a result, group companies carrying out insurance mediation for other companies within their group do not require authorisation provided they are funded solely by other members of the group and receive no commission for their activities.

It is believed that this remains the case even if the contract of insurance requires the naming of an independent shipmanagement company as co-insured, or naming of a bank as assignee. However, some practitioners take a different view and believe that in such circumstances the group company must be authorised. If the group company was to receive commission from an insurer or some other unrelated third party, the exemption would not apply.

The regulated activity must be carried out in the UK in order for FSA regulation to apply (s 19 FSMA). However, moving your business and
activities to another European country is not a means of escaping regulation. The IMD is a European directive and member states should bring into force laws, regulations and administrative provisions necessary to comply with the directive before January 15, 2005 - although some countries, including Germany and Spain, have already suggested that they will miss the deadline.

‘Gold plating’ (whereby a member state implements an EU requirement but includes additional rules) will determine the level of regulation imposed in each country. The UK has repeatedly been accused of gold plating and thereby making the IMD more onerous for those caught within its remit. For example, the IMD requires insurance intermediaries to purchase professional indemnity cover, but the FSA rules indicate that coverage must be extended to include fraud and dishonesty of employees. This is likely to result in extra costs that some other European competitors will not face.

The FSA's response to this allegation is that it does not ‘gold plate’ before it has carried out a ‘cost benefit analysis’ and has been through a process of consultation with the industries concerned. It seems that it is the industries who should take note and be more proactive, rather than reactive with the FSA.

Carrying out regulated activities without permission or exemption is an offence. The penalty on summary conviction is imprisonment of up to six months or a fine not exceeding the statutory maximum, or both; on conviction on indictment imprisonment of up to two years or a fine, or both.

Remember - you may not need to register, but if you do it is relatively easy and not as expensive as you might think.