Outline/Summary

By its recent fine of £21,000 against Aspray Limited, an insurance intermediary providing claims management services in the retail market, the Financial Services Authority ("FSA") has sent a warning to the insurance industry as a whole about the effectiveness of their controls in relation to outsourcing, and in particular the delegation and sub-delegation of underwriting or claims authority.

The Aspray fine is an effective reminder of the important principle of establishing and continuing to operate management and control systems for agents, and that same principle equally applies to coverholders.

Aspray highlights the discrete and fundamental operational importance of compliance.

• Non-compliance with regulatory rules can lead to sanctions regardless of whether the non-compliance caused any loss or damage to a third party. The FSA decided that, although none of Aspray's customers suffered any loss, and the risk of their doing so was low, the nature of Aspray's compliance failings were so widespread that they could have adversely affected all of Aspray's customers;
• Dealing in a fully compliant manner with an FSA investigation can save a business money: Aspray's fine was reduced from £30,000 because of its cooperation and remedial response;
• Aside from prejudice to third parties, the FSA may well take the view that a compliance failing has the potential to damage the FSA's ability to comply with its own statutory obligations (in particular, to maintain confidence in the financial system, to protect consumers, and to prevent financial crime) and self-set objectives (in particular, to promote efficient orderly and fair markets, and to protect consumers). A business could suffer badly if its failings were to be seen in this way.

Background

Aspray specialises in project managing property repairs. Between July 2007 and May 2008, the period to which the FSA final notice relates, Aspray managed a central booking system and provided training and sales support for its agents. The property repair work which generated Aspray's income was carried out by sub-agents, who, for the purposes of FSA regulation, were appointed representatives ("ARs").

Aspray advertised itself as acting on behalf of insureds, but at no cost to them. It also advertised services included negotiating with insurers to agree budgets and payment, and the appointment of quality contractors local to the insured. Aspray's Retail Mediation Activities Returns ("RMAR") stated that it had appropriate systems and procedures to ensuring compliance of its ARs, and that it carried out monitoring visits, audits and due diligence checks.

The FSA's Findings

The FSA revealed Aspray's failures to perform compliance visits, review any client files or make any financial checks on its ARs. The failure to exercise control over ARs had the potential to be significant because, among other things, Aspray allowed the ARs to deal direct with customers, including the handling of customer money by the collection of the insurance policy excess. Moreover, Aspray allowed its ARs to appoint contractors, but did not involve itself in their appointment. The ARs made appointments simply on the basis of contractors' adverts in free or general media (eg local papers or the internet).

Aspray also failed to operate a compliant system for dealing with ARs in the following respects:

• Due Diligence: a failure to obtain information or declarations from its ARs as to financial information, and disciplinary or regulatory history; no formal assessment of the candidates' capability or suitability to work in a regulated environment was carried out;
• Training: Aspray failed to provide the ARs with any initial training or information on FSA regulation and the ARs' responsibilities; Aspray additionally neglected to complete reviews in order to ensure that the ARs' training needs were being appropriately met;
• Monitoring: a failure to complete audit visits or perform formal monitoring on a regular basis of its ARs;
• Complaints: Aspray did not provide guidance or procedures for ARs to follow in the event of receiving a complaint – aside from informing Aspray's head office, which step was not followed in any event; the "Customer Comments Procedure" additionally failed to contain information about the Financial Ombudsman Service and the right of customers to refer complaints to it;
• Promotional Material: Aspray's standard client mandate provided for charges to customers in the event they cancelled the agreement after repair work had commenced; the FSA found this to be inconsistent with the advertised free service.

The above matters meant that Aspray's RMAR contained false information.

Ramifications for Practitioners

Requirements and guidance as to dealing with ARs are set out in particular in Chapter 12 of the Supervision sourcebook in the FSA Handbook. Aspray's failings were clearly substantial, and arose at every stage of its operational process. Yet Aspray is unlikely to be alone in failing to operate a comprehensive management system over its agents. It is usually the case that insurers and intermediaries will carry out effective due diligence and the other steps appropriate for appointing an agent (eg the execution of a fully claused binding authority). However, it can happen that agreed control mechanisms are not utilised sufficiently. For instance: a once-a-year audit may not be frequent enough to oversee a wide-ranging or complex delegated portfolio; the scope of audits can become unduly narrow, or make particular assumptions about an agent's operations which are not tested or which cease to be accurate.

Finally, sub-delegation, and agents' marketing literature and activities can often cause problems. Sometimes principals in agency relationships assume that where there is an express contractual bar on sub-delegation or certain promotions, this will be sufficient to protect their interests. Experience however shows that contractual terms need to be supplemented by regular and careful review.