The Underwriter has been censured for breaching Principle 11 of the FSA's Principles for Business which requires a firm to be open and co-operative with the FSA. Mr Rutter has been fined for breaching Principles 1 and 4 of the Principles for Approved Persons. Principle 1 states that an approved person must act with integrity in carrying out his controlled function whilst Principle 4 requires an approved person to deal with the FSA in an open and co-operative way.
Andrew Procter, the FSA's Director for Enforcement, said:
"The management of regulated firms should be in no doubt as to the importance of dealing openly with the FSA. Our regulatory framework places great emphasis on the role of senior management. If a firm takes steps to deliberately circumvent a regulatory requirement, the FSA will take disciplinary action against both the firm and its senior management. It is important that this message is clearly understood in the insurance industry."Under its former management, The Underwriter took steps that enabled the firm to circumvent a regulatory requirement set by the FSA. Despite regular discussions between the FSA and the firm, these steps were not mentioned by the firm. This meant that The Underwriter's reported premium income did not accurately reflect the underwriting risks to which it was committed. This is unacceptable and in breach of our Principles."
The Underwriter was authorised in October 1999 and was subject to premium income limits (PILs) set by the FSA for the years ending 1999, 2000, 2001 and 2002. These had the effect of limiting the amount of business the firm could write. The PILs came under pressure in 2001 and 2002 as insurance premium rates rose. In both 2001 and 2002, the firm took the decision to split insurance contracts and defer premium income into the following year, believing this practice to be acceptable, a view which is not shared by the FSA. This decision, for which Mr Rutter was ultimately responsible, had the effect of circumventing the PILs set by the FSA.
In deciding to issue this public censure to The Underwriter, the FSA took a number of factors into consideration. These included:
- the breaches relate solely to the firm's dealings and relationships with the FSA concerning its PILs and not to any other aspects of its business;
- the firm's current senior management were not responsible for the firm committing the breaches;
- no policyholder suffered as a result of the insurance contracts being split; and
- the firm has been open and co-operative with the FSA during the FSA's investigations.
In deciding the level of penalty to be imposed on Mr Rutter, the FSA took a number of factors into consideration. These included:
- Mr Rutter has suffered a financial loss as a result of leaving the firm;
- Mr Rutter was ultimately responsible for the cancellation of insurance contracts due for renewal and the decision to stop writing new insurance business in the last quarters of 2001 and 2002;
- Mr Rutter made no personal gain in respect of the split premiums; and
- Mr Rutter has been open and co-operative with the FSA during the FSA's investigations.
Background
- The full text of the Final Notices for The Underwriter and Mr Keith John Rutter are available on the FSA website. They include the background to the case, the relevant statutory provisions, the regulatory requirements contravened and the factors taken into account by the Regulatory Decisions Committee when making their decision.
- The Underwriter was authorised by the FSA on 8 October 1999. Mr Rutter was employed by the firm as CEO from its inception until his resignation on 7 March 2003. Mr Rutter was also principal underwriter for some of that time.
- On 10 July 2003, the FSA granted an application by The Underwriter for it to vary its permission by removing the regulated activity of effecting contracts of insurance as principal. On 11 July 2003, The Underwriter ceased to write new business and was placed in run-off.
- Premium income limits (PILs) are regulatory requirements that were placed on new insurance companies such as The Underwriter, to reduce the risk that they become over-exposed in the market compared to their business plans approved at authorisation. PILs set out limits on the total amount of business that a firm can transact in any given year. The FSA expects firms to inform it if they anticipate breaching a PIL and to explain what remedial steps they propose to adopt to avoid a breach occurring.
- In both 2000 and 2001 the FSA approved applications from The Underwriter to increase the PILs set by the FSA. Pressure on the PILs continued as a result of rising premium rates. The firm took steps to circumvent the PILs in both 2001 and 2002, by splitting some insurance contracts to defer premium income into the following year. These steps enabled the firm to remain below its PILs which it would otherwise have breached by £0.5m (less than 1% of the PIL) in 2001 and £2.4m (less than 3% of the PIL) in 2002.
- The FSA's policy on public disciplinary action states that public censure may be an alternative to financial penalties subject to criteria which include the financial resources available to the firm.
- Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
