FSA condemns insurance brokers' lax anti-bribery controls

Out-Law News | 19 May 2010 | 10:58 am | 4 min. read

Many commercial insurance brokers would be unable to defend themselves properly if charged under the new Bribery Act, the Financial Services Authority (FSA) warned this month.

The Act, which was passed on 8th April but is not yet in force, introduces a new criminal offence: "failure of commercial organisations to prevent bribery".

It is a defence under the Act if the organisation can show it had adequate policies, systems and processes in place to prevent bribery and corruption. What procedures are adequate will be set out in non-statutory guidance to be published by the Secretary of State in due course.

But a new report by the FSA identifies ongoing failings in the measures taken by brokers to ensure that payments made to third parties are not in fact bribes paid to win business from overseas clients, particularly in high risk jurisdictions.

"We have concluded that broker firms have approached higher risk business involving third parties far too informally and many firms are still not operating at acceptable standards," the paper concludes. "These firms need to do more to ensure they minimise the risk of becoming involved in bribery or corruption, unwittingly or otherwise. 

"At present, we judge that the serious weaknesses identified in some broker firms' systems and controls mean there is a significant risk of illicit payments or inducements being made to, or on behalf of, third parties to win business".

Concerns

The FSA first became concerned about brokers' exposure to bribery in 2007 when investigating a case against Aon Ltd. In January 2009, Aon was fined £5.25 million for failing to counter the risk of bribery associated with making payments to overseas firms and individuals.

From late 2008 to early 2010, the FSA reviewed 17 broker firms' anti-bribery measures. The final report, published on 14th May, notes some examples of good practice, but includes a far longer list of common concerns. 

For instance, most of the firms reviewed had given a senior manager responsibility for overseeing bribery risks, but over half of those managers did not clearly understand the issues involved.

Front-line staff, too, were uncertain about the anti-bribery and corruption standards expected of them, particularly when dealing with third parties. Little or no specific training was provided, even for staff in higher risk positions. Vetting controls on staff joining the firm were weak compared with other financial sectors, with firms continuing to rely on personal referrals and market gossip.

Firms were also failing to carry out proper due diligence when teams or business were acquired. The report reminds firms that they are responsible for all the business on their books and cannot point to another firm's due diligence checks as a defence for weaknesses in their own systems and controls.

Due diligence

The review found many firms were not taking a risk-based approach to their anti-bribery controls. Instead of focusing their efforts on jurisdictions, classes of business and third parties regarded as high risk, most of them had adopted a "one size fits all" approach which frequently fell short of what was required.

And although more firms were beginning to conduct regular reviews of their third party relationships, many still relied too heavily on informal market knowledge. In some cases, the FSA found a "worrying lack of documentary evidence of due diligence," suggesting no checks were being carried out at all.

The regulator was also disappointed to find so few firms were conducting detailed checks to see if third parties were connected with the insured, the client or a public official. The report suggests one relatively simple way to do this would be to inform the insured and/or the client of any third party receiving commission as a matter of course. 

Commission

The FSA says it is essential that firms understand the business case for all their third party relationships, whether they established them or acquired them.

But even when dealing in riskier jurisdictions and classes of business, the review found that many firms tended to focus on winning new business and failed to consider whether the high commission they were paying to third parties might constitute a bribe, or be passed on as a bribe.

In addition, commission was often shared equally or nearly equally with third parties, regardless of whether the service they provided was worth that amount. Overall, there was very little evidence of firms setting risk-based commission limits or drawing up commission guidelines.

Other risky practices included firms giving large cash sums to staff for travel costs in jurisdictions where they said credit cards were not readily accepted and accepting informal confirmation of bank details by email rather than asking for an original bank statement or cheque.

Remuneration

Bonus payments are also under scrutiny. Although the FSA's new remuneration code for large UK banks, building societies and broker dealers does not apply to insurance brokers, the FSA says it regards it as good practice for broker firms to consider whether their remuneration structures give rise to an increased bribery risk and what measures they should take to reduce that risk.

"Worryingly, a significant number of firms visited had bonus schemes for producing brokers which focused entirely on income or profit they generated and, in some cases, there was a direct formulaic link," the report states.

"It is our view that remuneration structures of this kind could encourage risk-taking and negligence and increase the risk of bribery and corruption, particularly where producing brokers use third parties to win business. This underlines the need for effective due diligence on third party relationships by staff independent of the producing department."

Examples of structures likely to reduce risk include a "balanced scorecard," where several factors are taken into account including general good compliance practice. Another is to defer payment over a period of time, possibly with clawback provisions applying if certain objectives or targets are not met.

Although the report does not constitute formal guidance, the FSA clearly intends insurance brokers to act upon it. "We expect firms to consider our findings, to translate them into more effective assessment of this risk and to implement and maintain more effective appropriate controls where necessary," it said.

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