If marketing agencies recommend insurance products to their clients, be it film shoot cover, death and disgrace, over-redemption or prize indemnity, they might well be breaking the law. Charles O’Reilly, of specialist insurance broker Tyser Special Risks.
FSA and the Promotional Marketing Industry
Following the EU’s Insurance Mediation Directive, the UK Government, effective 14 January 2005, made it illegal for any organisation to carry out any part of the process relating to general insurance products unless it is operating within the constraints imposed on the industry by the Financial Services Authority ("FSA") and its "Handbook" of rules.
The following notes, which have been produced by Tyser Special Risks, part of Tyser Holdings Ltd an independent Lloyd’s broker, are an interpretation of the regulatory position as it is perceived in relation to Communication Agencies advising their clients on the use of insurance products, and should be considered in conjunction with more specific legal advice. It does not govern policies where the agency is the client. TSR is a specialist broker to the marketing sector.
Anyone who sells or advises on the sale of general insurance products, including giving advice, premium handling, dealing with claims and issuing policies will need to be authorised under one of the following categories or face the consequences of breaking the law.
- FSA Authorised Intermediary (AI) is an individual or company that is fully governed, regulated and monitored by the FSA. They are able to offer insurance services in accordance with the level of Permission that has been granted to them by the FSA.
- Appointed Representative (AR) (of an Authorised Intermediary) is a representative of an AI and able to carry out the full duties of an FSA Authorised Intermediary but is governed by exactly the same regulations as an AI. The AI takes on the responsibility of regulating the AR. Therefore, the AI must monitor and control all regulated insurance activity by the AR but the AR will be responsible for maintaining its’ own Professional Indemnity Insurance and be available for inspection by the FSA.
Alternatively, anyone effecting introductions only, and not involved in any way, in giving insurance advice, handling premiums, participating in any part of the claims process and/or issuing policies would need to be appointed by the Authorised Intermediary as either:-
- Introducer Appointed Representative. An IAR cannot carry on any insurance activities other than introduce two parties to each other. They cannot give advice, whether negative or positive, handle premiums, policies or be involved in any claims. They can receive commissions if there is an agreement in place with the Intermediary but such commissions cannot constitute a principal element of their business.
- Introducer (I) can only recommend an Intermediary to the client but cannot inform the Intermediary of such an introduction. No advice must attach to such recommendations. As with the IAR a proper agreement must govern the payment of any commissions.
Please note that 2, 3 & 4 above require Agreements to be signed with an AI.
The regime governing the first two classifications is too onerous for most agencies to contemplate and offers insufficient advantages. The last is simple, if limited, but prevents the agency providing their client with its normal service level, and it is the TSR recommendation that all communications agencies wishing to offer insurance advice sign agreements to become IARs.
An AI is required to carry out full checks on any company it appoints as an IAR and the AI is required by the FSA to satisfy itself that the IAR is of good repute and fit & proper. This will include Criminal Records Bureau clearance for a maximum of two nominated principals and a demonstration that they fully understand the relevant FSA regulations. In addition, in order for the FSA & the AI to be satisfied the IAR remains fully compliant, TSR will need to carry out an audit either annually, or at more frequent intervals should the need arise.
Agency signs a commission sharing agreement with TSR to become an IAR
· Agency pitches for business
Can mention that insurance is available but must recommend that all discussions are held with an Authorised Intermediary. Agencies cannot budget for insurance as any figures given could be inadequate or inappropriate to client ‘demands and needs’.
If a client asks how much should be allowed for insurance the agent should ask how much the client wants to spend. If the client says that they want to spend x then the client has expressed the parameters required. (‘demands and needs’)
· Agency wins business
Agency should obtain authority from client to pass on information for quotes, but cannot offer advice
Client issues a standard letter of authority allowing release of information for quote purposes
· Promotional planning complete
Agency advises client that insurance cover is available. Any insurance question must be answered by an Authorised Intermediary only. On agreement in writing Agency forwards information to TSR who then deals directly with the client.
Client provides any supplementary information direct to TSR.
· Quotes obtained by TSR
Quotes must be presented directly to the client by TSR with or without the agency present.
The client is handed a ‘terms of business agreement’ (TOBA), a ‘demands and needs’ statement and a policy summary containing details of underwriting information
· Order given
Proposal form signed and instructions given to broker
· Premium Payment
TSR pays commission to agent
Premium paid direct to TSR
· Policy issued
Sent direct to client
Notifies, and completes all further negotiations with TSR
This procedural mapping demonstrates the impact of the measures introduced and how important it is to talk to your existing legal advisers and/or Intermediary to ensure that all future practice is compliant with the law. Compliance will not affect the payment of commission. Please contact Charles O’Reilly at TSR to discuss these changes and to arrange a staff presentation if required.
It seems unlikely that the FSA had the communications industry in mind when it constructed these rules, however, they must be followed in order to provide a professional service that is clear, fair and not misleading;
- Any client that does not use an Authorised Intermediary may risk dealing with an unscrupulous and financially unsound company.
- The reputation of the client could be tarnished by not using an Authorised Intermediary.
- Any Intermediary who is not suitably authorised by the FSA who is placing cover on someone else’s’ behalf, will be committing a criminal act and will be prosecuted.
Charles O’Reilly can be contacted via email email@example.com or on 020 7623 6262
Tyser Special Risks, 12-20 Camomile Street, London EC3A 7PJ