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Published 30 July 2010
Contents
UK Bribery Act 2010
FSA bans three insurance professionals for a £2 million fraud
CEIOPS reports on preparedness of insurance supervisors to implement Solvency II
CEIOPS releases Draft Advice on Equivalence assessments
Solvency II fifth Quantitative Impact Study
UK Bribery Act 2010
Pressure for Britain to strengthen its laws on bribery has been growing for some time and as a result the UK Bribery Act 2010 was enacted by Parliament in April. Some firms believe that the Act is one of the most draconian pieces of anti-bribery and corruption legislation in the world. Under this new legislation, commercial organisations are now liable for the activities of associated third parties as well as those of its own staff.
The Act creates four categories of offence, which address the following:
- offering, promising or giving a bribe to another person;
- requesting, agreeing to receive or accepting a bribe from another person;
- bribing a foreign public official; and
- a corporate offence of failing to prevent bribery.
Active and passive bribery
Active bribery means giving, promising or offering a bribe. Passive bribery is requesting, agreeing to receive or accepting a bribe. A bribe in this context may occur where a “financial or other advantage” is given or received where this is linked to “improper performance” of a work-related function. This includes giving an advantage in the knowledge that the acceptance of the advantage alone would be an “improper performance” of a work-related function. The scope of these offences is intentionally broad and applies not only to cash inducements, but also to gifts and other advantages.
Bribery of FPOs
This offence applies to bribes given with the intention of influencing the Foreign Public Official (FPO) in his official capacity. The person giving the bribe must also intend to obtain or retain business or an advantage in the conduct of business. The definition of FPO includes anyone who holds a legislative, administrative or judicial position of any kind, or exercises a public function for any country, public agency or public enterprise, or is an official or agent of a public international organisation. Notably, the Act does not directly address the concept of facilitation payments which may be accepted practice in other jurisdictions.
Failing to prevent bribery
A corporate entity can be found guilty of the above offences. In addition, a commercial organisation can be guilty of an offence if a person associated with that organisation bribes another with the intention of obtaining or retaining a business advantage for the organisation. There is a defence if the organisation can show that it had in place “adequate procedures” designed to prevent bribery. A person is associated with an organisation if that person performs services on behalf of the organisation. This is a very broad definition and can include not only other entities within the group and their directors and employees, but also consultants and agents.
Liability of directors and senior officers
Directors and other managers of a corporate entity may also face criminal liability if they are proved to have consented to or connived at the commission of a bribery offence by their company.
Firms can prepare for the implementation of the Bribery Act by considering the following controls:
- Board taking overall responsibility for anti-bribery and corruption;
- preparing and publishing a global code of conduct across all group companies and business partners;
- strong internal communications on anti-bribery and corruption, setting the tone from the top;
- training to ensure that staff are fully aware of their requirements;
- effective financial controls and record keeping;
- establish whistle-blowing procedures;
- robust due diligence on the selection and appointment of third parties and the imposition of controls over their terms of business;
- clear disciplinary measures and remedial action arising from unethical behaviour; and
- a reward and bonus structure that reflects the firm’s anti-corruption culture.
The 2010 Bribery Act was due to come into force later this year but has been delayed until April 2011 to allow the Government to undertake a consultation period which will allow commercial organisations to put in place a strategy to avoid falling foul of the Act. Despite the delay, firms should be acting now to put in place anti-bribery and corruption compliance programmes.
jonathan.steward@moorestephens.com
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FSA bans three insurance professionals for a £2 million fraud
The FSA has banned Timothy Higgins, Clifford Felstead and Ralph Brunswick from working in regulated financial services.
All three were involved in a scheme which defrauded Markel International Insurance Company, QBE Insurance (Europe) and Amalfi Underwriting over an extended period of time, exposing them to significant losses. Higgins would also have been fined £600,000 were it not for the fact that he had recently been made bankrupt.
Higgins was a director and founder of Surety Guarantee Consultants (SGC), a firm established in 2005 to write surety bonds, and Felstead was an employee of SGC in a management role. SGC held binding authorities with London market insurers, Markel and QBE (through its agent Amalfi), to issue surety bonds. SGC wrote business that exceeded its authorised limits, exposing Markel and QBE to greater liabilities than they had agreed. In doing so, SGC made secret profits and withheld over £2m that should have been paid to the insurers.
When SGC was audited by the insurers it produced false documents intended to show that it had kept within the terms of the binding authorities. It was aided by Brunswick who provided false documents in the name of a company located in the Isle of Man, where he was employed at the time.
SGC also lied to QBE about Felstead's previous conviction for fraud. When QBE was informed that an SGC employee had a conviction, it was told by SGC that Felstead would be leaving the company with immediate effect. Instead Felstead continued to be involved in SGC's surety bond business.
jonathan.steward@moorestephens.com
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CEIOPS reports on preparedness of insurance supervisors to implement Solvency II
CEIOPS has recently published results of its stocktaking exercise, the aim of which was to provide both CEIOPS and its members with a clear and comprehensive overview of the current levels of preparedness for Solvency II. As part of this exercise, CEIOPS were also seeking to identify areas where action is still needed in order to ensure the new solvency framework has the proper level of convergence of supervisory practices.
The main conclusions of the report are as follows:
- implementation of Solvency II is well underway in all surveyed supervisory authorities, although the level of advancement differs between those authorities, reflecting the complex and challenging process in the area of supervision, in order to implement Solvency II;
- supervisors’ transition to the new solvency framework is proceeding at an increasing pace, involving changes in mentality and competences, covering all the authorities’ sectors. This will require increased resources and often reorganisation and will apply even for those members whose present supervisory regime already includes forms of risk and principle-based supervision;
- CEIOPS has provided a strong role in preparing members for the new solvency regime. The main drivers of the overall process of implementation within supervisory authorities have been identified as the Solvency II working groups, CEIOPS training of staff, the various QIS exercises and the pre-application for internal models.
The exercise has also identified that further changes are still needed to bring supervisory methodology, tools and procedures in line with the demands which Solvency II brings.
carole.skinner@moorestephens.com
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CEIOPS releases Draft Advice on Equivalence assessments
CEIOPS has released Consultation Paper No. 81 “Equivalence assessments to be undertaken in relation to Articles 172, 227 and 260 of the Solvency II Directive”. Article 172 deals with the equivalence of reinsurance supervision, Article 227 deals with the group solvency calculation and Article 260 deals with the equivalence of third country group supervision. The paper is open for comment until 13 August.
The draft advice was produced following the European Commission Call for Advice requesting CEIOPS to identify and prioritise the third countries where an equivalence assessment would be desirable before the introduction of Solvency II, while also recognising that further equivalence assessments will be carried out subsequent to the first wave. The Commission noted that the overarching aim of the equivalence assessment should be to ensure that the third country supervisory regime ensures a similar level of policyholder protection as that provided under Solvency II. Therefore, in the same way that Solvency II adopts an economic risk-based approach to insurance regulation, the Commission stated that the focus of equivalence assessments should be on the substantive issue of whether the third country insurance undertakings are subject to a risk-based supervisory regime.
CEIOPS has considered a list of factors provided by the Commission of some of the factors which should be taken into account when determining the list of first wave third countries, in conjunction with the specific issues of each of the relevant Articles above. Those factors were as follows:
- whether the third country currently has a supervisory regime that is fully risk-based or has taken measures to move towards such a system;
- the materiality of an equivalence finding to EU insurance and reinsurance undertakings and their policyholders;
- the number of related undertakings situated in the third country held by EU insurance and reinsurance undertakings;
- the importance to the insurance market in the third country of the equivalence finding; and
- the existence currently of mutual recognition or equivalence arrangements between third countries and Member States.
Having considered these issues CEIOPS has concluded that its advice on possible third countries for inclusion in the first wave should focus primarily on the risk-based nature of the third country regime and the materiality of an equivalence finding to EU insurance and reinsurance undertakings and their policyholders. Recognising the current difficulties in pursuing an assessment of the United States, it is proposed to advise the Commission that as possible priorities for countries to be included in the first wave, it should consider:
- Switzerland and Bermuda, in respect of all three equivalence articles; and
- Japan in respect of Article 172.
CEIOPS therefore has invited these countries to indicate whether they are willing to undergo equivalence assessments in relation to each of the relevant articles.
carole.skinner@moorestephens.com
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Solvency II fifth Quantitative Impact Study
The European Commission recently issued a 'Call for Advice’, requesting CEIOPS to run a fifth Quantitative Impact Study between August and November 2010 and to publish a report on the results of that exercise in April 2011 in the frame of the development of level 2 implementing measures for the Solvency II Directive 2009/138/EC.
The QIS5 exercise has the following objectives:
- to provide all stakeholders with detailed information on the quantitative impact on insurers and reinsurers'solvency balance sheets of the introduction of future level 2 implementing measures under Solvency II compared to the situation under Solvency I;
- to check that the technical specifications laid down in the Annexes to the Call for Advice are aligned with the principles and calibration targets set out in Directive 2009/138/EC;
- to encourage insurers, reinsurers and supervisors to prepare for the introduction of Solvency II and to identify areas where their internal processes, procedures and infrastructure may need to be enhanced, and in particular, to encourage insurers and reinsurers to improve their data collection processes; and
- to provide a starting point for an ongoing dialogue between supervisors and insurers and reinsurers in preparation for the new supervisory system.
Ideally, all insurance and reinsurance undertakings under the scope of the Solvency II directive should participate in QIS5.
As with previous QIS exercises and to maximise participation, insurers and reinsurers will be invited to take part in the QIS5 exercise on a best efforts basis. However, where alternative approaches are provided for in the QIS5 exercise, insurers and reinsurers are strongly encouraged to provide data on each alternative in the technical specifications laid down in the annexes to the Call for Advice, in order to enable a comparative quantitative analysis of the different approaches to be conducted. In particular, insurers and reinsurers providing quantitative results derived using their internal model should also provide results calculated using the SCR Standard Formula.
Insurance and reinsurance groups should submit their results to the CEIOPS centralised database, as well as to national supervisory authorities, in order to enable an aggregate analysis of the impact on cross-border groups to be conducted.
In order to provide a complete picture of the impact on insurance and reinsurance groups and make maximum use of the data gathered, CEIOPS members will need to work closely together and exchange information, especially with respect to the interaction between solo and group requirements as well as the eligibility and transferability of own funds.
The QIS5 final public report from CEIOPS should make optimal use of the information and data submitted by participant companies as the QIS exercises are a unique opportunity to gather detailed information of high quality. By performing an in-depth analysis of the QIS5 results and by sharing the results with all stakeholders, CEIOPS will make a major contribution to the Solvency II project as a whole.
In particular, the report should describe the overall impact of QIS5 specifications on the main items of the solvency balance sheet of insurance companies, i.e. comparing the Solvency II and Solvency I balance sheets.
The timetable for the QIS5 exercise is challenging. CEIOPS will have to work with, and will need the full support and collaboration of other stakeholders to ensure that the QIS5 exercise is executed successfully.
simon.gallagher@moorestephens.com
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We believe the information in this Insurance Regulatory Alert to be correct at the time of publication, but cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action of any item herein.