Vol 1 (2004) - Issue 3

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Regulation of Insurance Intermediaries in the United Kingdom and Insurance Broker Insolvency

As part of the UK’s implementation of the Insurance Mediation Directive (No. 2002/92/EC) (the ‘IMD’), which imposes requirements on EEA States relating to the regulation of insurance and reinsurance mediation, the UK Financial Services Authority (‘UK FSA’) will regulate insurance mediation activities from 14 January 2005. The IMD is being brought into force in the UK through various new pieces of secondary legislation which will come into force on 14 January 2005.
Certain activities carried on by insurance intermediaries in relation to life policies are already regulated by the UK FSA. The changes coming into force in January, however, will put all insurance mediation activities within the ambit of the UK FSA’s regulatory powers.

The UK FSA consulted on these changes in Consultation Paper 174, published in March 2003, with the consultation period ending in June 2003. The UK FSA issued feedback on Consultation Paper 174 via its Policy Statement 174 in September 2003, which included the ‘near final’ text of the supervision, enforcement and other requirements (the ‘rules’) that will come into force in January 2005. These rules were finalized in January 2004, and guidance to the new rules (published in February 2004) appears at Appendix 5 of the Authorization Manual (AUTH) of the FSA Handbook.

Under the new regime, intermediaries and insurers that carry on the activities of arranging, administering or are involved in the performance of general insurance business will require UK FSA authorization from 14 January 2005. Those firms that are already authorized by the UK FSA will not need to re-apply for FSA regulation; however, they will need to apply to vary their authorization (known as ‘Part IV permission’) so that their insurance mediation activities are covered. In order to ensure that they are properly authorized by 14 January 2005, insurance intermediaries will need to submit their applications to the UK FSA by 14 July 2004.

Other aspects of FSA regulation

From 14 January 2005, in addition to those new rules specifically aimed at regulating insurance intermediary activities, insurance intermediaries will also be required to comply with various of the UK FSA’s existing rules, including:

- Threshold Conditions (COND) - which determine whether an applicant is a ‘fit and proper’ person to carry on the activity;
- Senior Management Arrangements, Systems and Controls (SYSC) - which require firms to distribute responsibilities appropriately and includes maintenance of appropriate reporting lines and delegation, compliance, risk assessment and suitability of employees; and
- The Approved Persons Regime (FIT) – which requires that directors and managers who carry out ‘controlled functions’ be individually approved by the UK FSA.

Insurance intermediaries will also need to comply with the UK FSA’s Principles for Businesses (PRIN), the Insurance Conduct of Business Rules (ICOB) and the Interim Prudential sourcebook for insurers (IPRU (INS)).