Annex 3
UK AND EU LAW RELEVANT TO THE MANAGEMENT OF CONFLICTS
OF INTEREST
Conflict of interest provisions under UK law
1.1 Rules on the management of conflicts of interest
applicable to insurance companies in the UK (and to all other
businesses which are providing financial services regulated under
the Financial Services and Markets Act 2000 ("FSMA"))
are laid down by the FSA under its powers under that Act.
1.2 The principles, rules and guidance laid down
by the FSA under Part X of FSMA, are set out in full in the FSA
Handbook. All businesses engaged in activities which are regulated
under FSMA, including managing agents and Lloyd's brokers, are
subject to them. Regulated activities which are particularly relevant
to insurance companies and insurance intermediaries are effecting
and carrying out a contract of insurance as principal; making
arrangements for another person to enter into insurance contracts,
advising on such contracts or assisting in the administration
and performance of a contract of insurance.
General principles
1.3 The principles set out in the PRIN section of
the FSA Handbook state the fundamental obligations of firms under
the regulatory system. They apply in whole or in part to every
firm regulated under FSMA. The principles most relevant to questions
arising in relation to the management of conflicts of interest
are:
(a) Principle 1 - a firm must conduct its business
with integrity;
(b) Principle 6 - a firm must pay due regard to the
interests of its customers and treat them fairly;
(c) Principle 8 - A firm must manage conflicts of
interest fairly, both between itself and its customers and between
a customer and another client.
1.4 Principles 6 and 8 apply only in relation to
customers (that is, clients which are not eligible counter-parties).[36]
1.5 Approved persons (those who exercise controlled
functions within the meaning of section 59 of FISMA, and therefore
require approval from the FSA)[37]
are also subject to the principles in the APER section of the
FSA Handbook. Principle 1 in APER 4 provides that:
"An approved person must act with integrity
in carrying out his controlled function."
Principle 2 in APER 4 provides that
"An approved person must act with due skill,
care and diligence in carrying out his controlled function."
1.6 The guidance published in the FSA Handbook on
the application on these principles notes that deliberately failing
to disclose the existence of a conflict of interest in connection
with dealings with a client amounts to failure to comply with
Principle 1 (APER 4.1.13). Failing without good reason to disclose
the existence of such a conflict amounts to failure to comply
with Principle 2 (APER 4.2.10).
1.7 What is considered to breach one of the principles
will depend on the facts of a particular case. The FSA guidance
notes that "in determining whether a principle has been breached
it is necessary to look to the standard of conduct required by
the principle in question".
1.8 Further guidance is provided on the application
of Principle 8 on the management of conflicts of guidance in ICOBS
(the section of the FSA Handbook which sets out rules for the
conduct of business by firms carrying out insurance related activities)[38].
In ICOBS 8.3.3 it is noted that, generally:
(2) [Principle 8] means that a firm handling
a claim should not put itself in a position where its own interest,
or its duty to anyone for whom it acts, conflicts with its duty
to a customer. If it does so, it should have the customer's prior
informed consent.
(3) If a firm acts for a customer in arranging
a policy, it is likely to be the customer's agent (and that of
any other policyholders). If the firm intends to be the insurance
undertaking's agent in relation to claims, it needs to consider
the risk of becoming unable to act without breaching its duty
to either the insurance undertaking or the customer making the
claim. It should also inform the customer of its intention.
(4) A firm should consider whether it is possible
to manage such a conflict through disclosure and consent. An example
where these are unlikely to be sufficient is where the firm knows
both that its customer will accept a low settlement to obtain
a quick payment, and that the insurance undertaking is willing
to settle for a higher amount.
Obligation to inform customers
1.9 Under ICOBS 4.1.1, an insurance intermediary
is required to provide certain information to a customer before
the conclusion of an initial contract of insurance and, if necessary,
when that contract is amended or renewed. Under ICOBS 4.1.2, this
information must include:
(3) whether it has a direct or indirect holding
representing more than 10% of the voting rights or capital in
a given insurance undertaking (that is not a pure reinsurer);
(4) whether a given insurance undertaking (that
is not a pure reinsurer) or its parent undertaking has a direct
or indirect holding representing more than 10% of the voting rights
or capital in the firm…
1.10 Under ICOBS 4.1.6, an insurance intermediary
must at the same time tell its customer whether:
(a) it gives advice on the basis of a fair analysis
of the market; or
(b) it is under a contractual obligation to conduct
insurance mediation business exclusively with one or more insurance
undertakings; or
(c) it is not under a contractual obligation to conduct
insurance mediation business exclusively with one or more insurance
undertakings and does not give advice on the basis of a fair analysis
of the market.
1.11 An insurance intermediary that does not advise
on the basis of a fair analysis of the market must inform its
customer that he has the right to request the name of each insurance
undertaking with which the firm may and does conduct business.
The intermediary is required to comply with such a request (ICOBS
4.1.6(2)).
Inducements
1.12 ICOBS 2.3.1 provides guidance on the application
of the principles to the accepting and receiving of inducements:
(1) Principle 8 requires a firm to manage conflicts
of interest fairly, both between itself and its customers and
between a customer and another client. This principle extends
to soliciting or accepting inducements where this would conflict
with a firm's duties to its customers. A firm that offers such
inducements should consider whether doing so conflicts with its
obligations under Principles 1 and 6 to act with integrity and
treat customers fairly.
(2) An inducement is a benefit offered to a
firm, or any person acting on its behalf, with a view to that
firm, or that person, adopting a particular course of action.
This can include, but is not limited to, cash, cash equivalents,
commission, goods, hospitality or training programmes.
Provisions applying specifically to Lloyd's
1.13 The FSA has imposed particular requirements
on Lloyd's. Under INSPRU 8.2.6, managing agents are required "to
establish and maintain adequate systems and controls to manage
the risks to which the insurance business carried on through each
syndicate it manages is exposed". In complying with this
rule, they are required to have particular regard to—
(1) "transactions which may give rise to a conflict
of interest, such as those to which the counterparties are:
(a) other members of the managing agent's own group;
(b) any members of any syndicates managed by the
managing agent; or
(c) any entity that is part of a group to which one
or more members of any syndicates managed by the managing agent
belong, and
(2) transactions involving:
(a) the provision of capital;
(b) the provision of reinsurance; or
(c) the provision of other services."
1.14 In addition, the Society is required to establish
and maintain effective arrangements to monitor and manage risk
arising from "conflicts of interest (including in relation
to inter-syndicate transactions (including reinsurance to close
and approved reinsurance to close,[39]
related party transactions, and transactions between members and
itself)" (INSPRU 8.2.11). This rule appears only to relate
to transactions to which the Society is itself a party, so it
will be of limited if any relevance in guarding against abuses
arising out of conflicts of interest between names and underwriting
agents.
Disciplinary sanctions
1.15 Breaching rules made under the Act (including
the principles set out in the Handbook) makes a firm liable to
disciplinary sanctions. Under section 205 of FSMA, the FSA may
publish a statement that an authorised person has contravened
a requirement imposed on him under the Act, exposing the person
or firm concerned to public censure. Under section 206 of the
Act, the FSA has the power to impose a financial penalty on any
authorised person it considers has contravened a requirement imposed
under the Act. The penalty may be "of such amount as [the
FSA] considers appropriate". It is not limited by the Act.
1.16 Breach of the principles or other rules may
also trigger the FSA's powers to vary (or withdraw) permission
under Part IV of FSMA, if it leads the Authority to conclude that
it is desirable to exercise that power to protect the interests
of consumers, under section 45 of the Act.
1.17 Breach of the principles or other rules may
also provide grounds for the FSA to apply to the court for an
injunction under section 380 of the Act seeking an order restraining
the contravention or requiring the person who has contravened
a requirement laid down under the Act (or anyone else who appears
to have been knowingly concerned in the contravention) to take
such steps as the court may direct to remedy it.
Restitution and Injunctions
1.18 The FSA also has powers to apply to the Court
for a restitution order under section 382 of the Act, where it
can show that someone has contravened a requirement imposed under
the Act (which include the principles laid down in the FSA handbook)
and either that profits have accrued to him as a result of the
contravention or that one or more persons have suffered loss or
been otherwise adversely affected as a result of the contravention.
EU LAW ON INSURANCE INTERMEDIARIES
1.19 Council Directive 2002/92/EC on insurance mediation
accepts that insurance undertakings may carry out insurance mediation
activities: Insurance mediation is defined as—
"the activities of introducing, proposing or
carrying out other work preparatory to the conclusion of contracts
of insurance, 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 definition goes on to note—
"these activities when undertaken by an insurance
undertaking or an employee of an insurance undertaking who is
acting under the responsibility of the insurance undertaking shall
not be considered as insurance mediation".
They do not therefore require separate authorization.
1.20 The directive also provides for the authorization
of tied-insurance intermediaries - those insurance agents carrying
on the activity of insurance mediation for and on behalf of one
or more insurance undertakings in the case of insurance products
which are not in competition but does not collect premiums or
amounts intended for the customer and who acts under the full
responsibility of those insurance undertakings for the products
which concern them respectively. Similar provisions apply in relation
to reinsurance mediation.
1.21 Instead information requirements are imposed
on insurance and reinsurance intermediaries. Under article 12,
prior to the conclusion of any initial insurance contract, and,
if necessary, upon amendment or renewal thereof, an insurance
intermediary shall provide the customer with information including—
"whether he has a holding, direct or indirect,
representing more than 10% of the voting rights or of the capital
in a given insurance undertaking" (article 12(1)(c)) and
"whether a given insurance undertaking or parent
undertaking of a given insurance undertaking has a holding, direct
or indirect, representing more than 10% of the voting rights or
of the capital in the insurance intermediary" (article 12(1)(d)).
1.22 The insurance intermediary must also inform
the customer, concerning the contract that is provided, whether
"he is under a contractual obligation to conduct insurance
mediation business exclusively with one or more insurance undertakings"
(and to provide the names of those undertakings on request); and,
if he is not under such a contractual obligation, and does not
give advice based on a fair analysis, he must at the customer's
request provide the names of the insurance undertakings with whom
he does do business (and inform the customer of his right to request
such information).
1.23 This information does not need to be provided
where the insurance intermediary mediates in the insurance of
large risks, or in the case of mediation by reinsurance intermediaries.
(Article 12(4)). These provisions are implemented in UK law through
the FSA Handbook, ICOBS 4.1.2 (see above).
36 An "eligible counter party", for the purpose
of the principles, includes governmental bodies (such as governments,
central banks and state investment bodies); another firm or recognised
investment exchange, designated investment exchange or clearing
house. Other entities, such as local authorities or bodies corporate
with minimum capitalisation of £10 million (or satisfying
other tests), or a partnership or trust with net assets of £10
million may also be treated by a firm as an eligible counter-party
provided that (a) they are advised in writing by the firm that
they are being treated as an eligible counter-party, and that
this implies the loss of protection under the regulatory system,
and (b) no objection has been received. Lloyd's names who are
individuals with unlimited liability may not be treated as eligible
counter parties for the purpose of these principles. Back
37
Apart from those in controlling functions, this would include,
for example, anyone in a management functions such as a senior
manager with significant responsibility for the effecting by an
insurer, or by a managing agent on behalf of a member of the Society
of Lloyd's, of contracts of insurance other than contractually
based investments. Back
38
ICOBS applies to firms carrying out insurance mediation activities;
effecting and carrying out contracts of insurance; managing the
underwriting capacity of a Lloyd's syndicate as a managing agent
at Lloyd's or communicating or approving financial promotions,
and connected activities. Back
39
""Approved reinsurance to close" excludes reinsurance
between parties other than members; and balance transfers between
syndicate years of syndicates having only one member, which have
no effect on the overall liabilities of that member." Back
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