In 2010 the Financial Services Authority (FSA) published a report (FSA 2010 report) on anti-bribery and corruption in commercial insurance broking (a link to our update on this report can be found here). The 2010 report reviewed how well commercial insurance intermediaries managed the risks of making corrupt payments to third parties and concluded that there were serious weaknesses in some intermediaries’ anti-bribery and corruption (ABC) systems and controls. The FSA 2010 report concluded that there were significant risks that intermediaries might make illicit payments or inducements to third parties.
The findings of the recent Financial Conduct Authority (FCA) review
After taking over regulation from the FSA, the FCA undertook a thematic review to assess how the commercial intermediary sector had responded to the specific issues identified in the FSA 2010 report and to consider how well intermediaries were addressing bribery and corruption risks across their wider business and how well risks were addressed through governance, due diligence and ongoing monitoring.
The thematic review took place between October 2013 and June 2014. Ten intermediaries were visited of which nine were Lloyd’s brokers. All the intermediaries were medium-size or smaller.
- Most intermediaries in the sample did not yet adequately manage the risk that they might be involved in bribery and corruption.
- Although half the sample had started to look at ABC risks, work being done was still in progress and more work was required to ensure that the measures were fully effective.
- Three of the intermediaries in the review were unaware of the FCA/FSA work being undertaken on bribery and corruption risks.
- Most progress had been made in relation to managing bribery and corruption risks posed by intermediary staff and work had been done on remuneration, gifts and hospitality policies and training.
- Only half the sample had adequately identified and assessed bribery and corruption risks across both the trading and non-trading aspects of their business. The remaining intermediaries had either focused on a limited number of relationships or had not carried out a business-wide review of bribery and corruption risks.
- The sample rarely assessed the bribery and corruption risks in a holistic manner and undertook limited due diligence on individual relationships with third parties.
- Too often assessments of risk were of limited scope: for example, only taking into account the jurisdiction risk. Other factors, such as how the intermediary is paid, the sector and class of business, whether any political relationships were involved and the findings of any due diligence were not sufficiently taken into account.
- Due diligence was weak in relation to bribery and corruption risks in almost half of the sample reviewed. The FCA found that in some cases intermediaries had failed to record key information properly, including terms of business agreements and information about third parties and their owners.
- Intermediaries had not always evidenced the business rationale for including third party intermediaries in the distribution chain.
- Most intermediaries sampled applied the same levels of due diligence, sign-off and monitoring regardless of the risk classification that the potential relationship had been given.
- Policies and procedures often did not require approval of a higher risk relationship at a senior level of management. As a result, few such relationships obtained senior level approval.
- Relationships should be monitored on an ongoing basis. Progress amongst the sample of intermediaries in this respect had been slow. Less than half of the files on third parties in the intermediaries sampled had been reviewed or monitored.
- Although intermediaries now have documented policies in relation to receipts for expenses, the range of thresholds above which senior management approval would be required diverged widely. In addition, the FCA found examples of senior managers approving their own expenses.
- Both bonus and remuneration structures and ABC training had improved since the FSA 2010 report. However training should include a test to ensure that the training is effective.
What happens next?
All commercial insurance intermediaries are asked to take the above findings on board, especially those who act on a wholesale basis. The FCA will update Financial Crime: a guide for firms to reflect the findings of this thematic review.
What should intermediaries do?
Commercial insurance intermediaries should review their systems and controls in the light of the findings of the thematic review.
In particular, firms should extend their procedures for identifying risks across their business, the risk assessment criteria should extend beyond jurisdictional risk into other areas identified in the review, processes need to be put in place to ensure that riskier arrangements get adequate oversight at a senior level and management arrangements need to ensure that ABC measures take place on an ongoing basis.
For further information:
TR14/17: Managing bribery and corruption risk in commercial insurance broker, 14 November 2014