The FSA has today fined GoshawK Syndicate Management Limited ('GoshawK') £220,000 for systems and control failures primarily relating to its management of third party underwriting agreements (binding authorities). GoshawK signed a number of binding authorities permitting third parties to take on risks and/or settle claims, without properly vetting the third parties or monitoring their operation. This exposed the syndicate managed by GoshawK to unnecessary risk and contributed to significant losses on these binding authorities.
In addition to its failures relating to binding authorities, there was a breakdown in the system of independent review at GoshawK for the period October 2002 to August 2003. The independent review system provides a check on the activities of underwriters to ensure that they are complying with relevant systems and controls. The breakdown of this system meant that there was an inadequate review of risk.
Margaret Cole, FSA Director of Enforcement, said:
"GoshawK did not meet the standards the FSA expects from managing agents. It did not have adequate systems and controls in place to manage its binding authorities or to ensure adequate independent review of underwriters' activities. Had these been in place, they could have reduced the large losses experienced by the syndicate.
"The FSA considers that robust systems and controls are fundamental in helping to maintain efficient, orderly and fair markets and it will take firm action where firms fail to ensure they are in place."
The above failings are particularly serious given that GoshawK received reports from the Society of Lloyd's ("Lloyd's") in previous years that highlighted weaknesses in respect of controls over binding authorities and the system of independent review. As a result, the firm took steps to rectify the weaknesses and improvements were made. However, the revised controls were not implemented in an effective way.
In considering the size of fine, the FSA took into consideration that: the syndicate managed by GoshawK is closed to new business; GoshawK has limited assets available to pay a penalty; and GoshawK's current senior management were not responsible for the breaches and have been open and co-operative with the FSA during the FSA's investigations.
Background
- The FSA has concluded that GoshawK contravened Principles 2 and 3 of the FSA's Principles for Business and Rule 3.1.1 of the Senior Management Arrangements, Systems and Controls module of the FSA Handbook.
- Principle 2 provides that a firm must conduct its business with due skill, care and diligence. Principle 3 provides that a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
- Rule 3.1.1 of the Senior Management Arrangements, Systems and Controls module of the FSA Handbook provides that a firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business.
- The full text of the Final Notice, dated 10 October 2005, includes the background to the case, the relevant statutory provisions and the regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine.
- 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.
- GoshawK is a Lloyd's managing agent owned by GoshawK Insurance Holdings, a London based holding company. The firm was responsible for managing the business and affairs of Lloyd's Syndicate 102.
- On 30 October 2003, following discussions with the FSA, Lloyd's prohibited GoshawK from accepting new risks on behalf of Syndicate 102. This had the effect of placing Syndicate 102 into run-off.
- The FSA and Lloyd's entered into co-operation arrangements for the supervision and enforcement of Lloyd's managing agents with effect from 1 December 2001. Lloyd's has co-operated closely with the FSA during the course of this investigation.
- A binding authority is an agreement between a managing agent and a third party (referred to as the "coverholder") under which the coverholder may, in accordance with the terms of the agreement, accept risks and/or settle claims on behalf of the syndicate managed by the managing agent.
- 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 promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve our business capability and effectiveness
