Financial Conduct Authority (FCA) has fined five individuals and two firms a
total of £15.5m, in addition to banning four of those individuals, for
significant integrity and competence failings.
The FCA found that Shay Reches performed the CF1 (Director (AR)) controlled function at Coverall Worldwide Limited (Coverall), with responsibility for a managing general agent, Aderia UK Limited (Aderia), and conducted regulated activities, which were central to setting up and operating these insurance schemes, despite not being approved by the FCA to do so. In doing so, Mr Reches recklessly directed payments of insurance premiums to parties other than the insurers and reinsurers responsible for paying claims, increasing the risk that policyholders’ claims would not be paid.
This misconduct contributed to the failure of several insurance schemes as well as to three insurers going into administration. As a result, the Financial Services Compensation Scheme (the FSCS) has had to pay substantial claims, totalling £12.7m as at the end of 2015.
The FCA has fined Mr Reches £1,050,000. Mr Reches has also agreed to pay a sum of £13,130,000 to the three insurers, which will make a substantial contribution towards the liabilities to the FSCS and UK policyholders. If he fails to pay this amount or any part of it, the fine will be increased by the amount unpaid. These payments to insurers will deprive Mr Reches of the indirect benefit that the FCA considers he has gained from his misconduct. Mr Reches has also been prohibited by the FCA from performing any function in relation to any regulated activity.
Action was also taken against Colin McIntosh, Millburn Insurance Company Limited (Millburn), Coverall, Robert Bygrave, Andrea Sadler, Wayne Redgrave and Bar Professions Limited (Bar).
These actions were taken as a result of a joint investigation by the FCA and the Prudential Regulation Authority (PRA). The PRA will also be publishing Final Notices against Colin McIntosh and Millburn today.
Mark Steward, director of enforcement and market oversight, said:
"This was a hugely complex case with the FCA liaising with over 20 regulators and agencies around the world”.
"Mr Reches’ misconduct led to many solicitors and others being left without adequate insurance. He treated policyholders’ funds and their interests with reckless indifference and his misconduct was facilitated by an absence of proper controls by key persons at important stages of the insurance process. The FCA has also taken action against those responsible for poor controls and oversight.
"This case not only demonstrates the consequences of poor controls but also what can happen when the distribution chain becomes overly complex, participants fail to ask obvious questions or take rudimentary precautions, including those insurance intermediaries and brokers checking whether Mr Reches was approved to carry out the functions he was performing."
The investigations followed early intervention action taken jointly by the FCA and PRA between July and September 2013 following concerns raised about the validity of solicitors’ professional indemnity insurance (Solicitors’ PII) arranged for over 1,300 solicitors’ firms across England and Wales. Without such insurance solicitors are unable to carry on business. As a result of that early intervention action, the regulated activities of the various entities were halted and client money had to be ring fenced.
The insurance schemes that caused concern, and are the subject of today’s action, were all linked to Mr Reches. These schemes used binding authorities issued by a London-based managing general agent, Aderia, to various cover holders, including to specialist insurance broker, Bar, which sold Solicitors’ PII. Aderia was an appointed representative of a UK insurer, Millburn, and a UK insurance intermediary, Coverall.
For this complex system to work, security needed to be available from a number of insurers and reinsurers based in the UK, Europe and offshore. The principal risk carrier, Sinclair Insurance Company Limited (Sinclair), is registered in the Union of the Comoros and owned and controlled by Mr Reches.
The failings in the management oversight throughout these distribution chains and the failure of the reinsurance arrangements contributed to three of the insurers - Millburn, European Risk Insurance Company (ERIC) an Icelandic insurer, and Balva Insurance Company AAS (Balva) a Latvian insurer - going into administration, in part due to debts owed by Sinclair. As a result, they were unable to honour the insurance they had ultimately offered, through cover holders to solicitor customers and other policyholders, which risked those customers being left uninsured.