FSA Approved Person

DFL has ‘FSA Approved Persons’

The FSMA and the rules made under it prohibit anyone other than an approved person from undertaking a 'controlled function' within an authorised firm. A function is a controlled function only if the FSA is satisfied one of the following conditions is met:

• the function is likely to result in the person responsible for its performance exercising a significant influence on the conduct of a firm's affairs, so far as relating to a regulated activity of the firm; or
• the function will involve the person performing it in dealing with customers or dealing with the property of customers of a firm in a manner substantially connected with the carrying on of a regulated activity of the firm.

Those individuals exerting significant influence are divided into two types:

• Members of governing bodies of firms (directors, members of managing group of partners, management committees etc) being individuals who set the firm's business strategy, regulatory climate and ethical standards;
• Members of senior management to whom significant delegation has been made by the governing body of the firm. This delegation is likely to apply particularly in firms which are part of complex groups.

The criteria to be applied when considering an application for approval cover these groups of factors:

• Honesty, integrity and reputation;
• Competence and capability;
• Financial soundness.

Approved persons will be expected to act in accordance with the FSA's Statement of Principles.

All approved persons must:

• Act with integrity
• Act with skill, care and diligence
• Observe proper standards of market conduct
• Deal with the FSA in an open and co-operative way

In addition, all individuals with "significant influence" only must:

• Take reasonable steps to ensure that the regulated business for which they are responsible is organised so that it can be controlled effectively;
• Exercise due skill, care and diligence in managing the regulated business of their firm for which they are responsible;
• Take reasonable steps to ensure that the regulated business for which they are responsible complies with the regulatory requirements imposed on that business.

Further guidance may be found in the Code of Practice for Approved Persons.

There is no generally accepted definition of ART. As a rough guide, ART is the assumption, transfer or financing of risk(s) other than by way of traditional (re)insurance. But where does insurance end and ART begin? And why does it matter?

Whether you are an insurer or an intermediary, failure to appreciate the true nature of the product with which you are dealing could lead you to fall foul of the regulatory regime under the Financial Services and Markets Act 2000 ("FSMA").

It is not always easy to determine whether a product is insurance or another type of investment but some examples of those that are not insurance contracts include CBOT catastrophe options, weather derivatives, catastrophe bonds and catastrophe equity puts.

• It is a criminal offence to advise on and arrange any investment contracts for clients without authorisation from the FSA.
• Authorised intermediaries wanting to advise on ART products should ensure that their FSA permissions entitle them to advise on products other than straightforward general insurance contracts.
• An insurer is prohibited from carrying on any 'commercial business in the United Kingdom or elsewhere other than insurance business and activities directly arising from that business'. Insurance companies wishing to offer innovative solutions need to be sure that, on their true analysis, they are indeed insurance.

The FSA became responsible for regulation of general insurance intermediaries on 14 January 2005. Some of the main features of the new regime are as follows:-

• Insurance mediation activity means any of the following:

(a) Dealing in rights under a contract of insurance as agent.
(b) Arranging deals in rights under a contract of insurance.
(c) Assisting in administration and performance of a contract of insurance.
(d) Advising on buying or selling rights under a contract of insurance.
(e) Agreeing to do any of the activities specified in sub-paragraphs (a) to (d).

• Intermediaries must hold capital as follows:
  • The higher of £5,000 or 2.5% of annual income for intermediaries not holding client money or other client assets.
  • The higher of £10,000 or 5% of annual income for intermediaries holding client money or other client assets.
  • £50,000 for intermediaries holding client money in a non-statutory trust.
• Each intermediary will be required to take out and maintain professional indemnity insurance at prescribed levels from an insurer authorised in the UK, EEA or other designated country.
• Insurers must only use the services of insurance intermediaries which are authorised in the UK (or are exempt), registered in another EEA state or are not carrying on their insurance mediation activities in the EEA.
• Assisting in the administration of the performance of a contract of insurance is not a regulated activity where it is carried on by a person acting in the capacity of an expert appraiser or a loss adjuster acting for an insurer or a claims manager acting for an insurer.

Overview of Regulatory Regime

* Financial services providers, including insurers, are governed by the provisions of the Financial Services and Markets Act 2000 ("FSMA") and are answerable to the Financial Services Authority ("FSA").
* Companies may only carry on insurance business in the UK if they have the required authorisation. It is a criminal offence to carry on a "regulated activity" (including effecting and carrying out contracts of insurance) without authorisation by the FSA.
* Some personnel of firms regulated by the FSA must be "Approved Persons", directly answerable to the FSA.
* Insurance intermediaries (both life and general insurance intermediaries) are required to be authorised by the FSA to carry on their business.
* Lloyd's is required to exercise its regulatory powers under the direction of the FSA.
* Authorisation by the FSA is a necessary condition of operating at Lloyd's for managing and members' agents.
* Lloyd's brokers are now under the supervision of the FSA, subject to them also meeting certain Lloyd's accreditation criteria.

• The FSMA came into force on 1st December 2001.
• The FSMA provides only a regulatory framework - the detail is in the FSA's multi-volume Handbook.
• Sections of the Handbook relevant to general insurers include:
• Authorisation Manual
• Threshold Conditions
• Principles for Businesses
• Supervision Manual
• Integrated Prudential Sourcebook
• Senior Management Arrangements, Systems & Controls
• Fit & Proper Test for Approved Persons
• Statement of Principles and Code of Practice for Approved Persons (See next page for more information on the role of Approved Persons)
• Enforcement Manual

General insurance intermediaries must also comply with relevant sections of the FSA handbook, including volumes dealing with Insurance Conduct of Business (ICOB) and Client Assets (CASS).

Client Money and Risk Transfer

One of the major introductions following the FSA becoming responsible for the regulation of general insurance intermediaries was the Client Money rules as contained in the FSA's Client Assets Sourcebook ("CASS").

Key points arising out of CASS include the following:

• Intermediaries must hold insured’s' money either in a statutory trust account or a non-statutory trust account. Non-statutory trusts afford the benefit of the intermediary being able to make advances of credit from the funds held to allow an insured's premium obligations to be met before the intermediary has actually received the premium from the insured. Likewise, funds in a non-statutory trust may be used to settle claims before the claim payment has been received from the insurer.
• If intermediary deals agrees to risk transfer (i.e. that the intermediary acts as its agent for the purposes of receiving premiums or settling claims or premium refunds), that agreement bind and incepts coverage on receipt by the intermediary.
• Firms may "co-mingle" money held on behalf of insured’s with money held on behalf of insurers, and insurer consent to its interests being subordinated to the interests of the intermediary's clients, i.e. the insured’s.