The UK APER Principles | Wolters Kluwer Financial Services
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  • The UK APER Principles

    By Adam Samuel

    Published March 29, 2016

    Dedicated watchers of Final Notices issued by the Financial Conduct Authority (FCA) can sometimes notice patterns of behaviour among both the FCA and those they regulate in this area. The most obvious characteristic of the FCA is the way in which it follows its predecessor the FSA in not taking action against senior executives in UK banks unless it can prove using the “clear and convincing” evidence test culpability. Andrew Green QC in his recent report on HBOS shows that the regulator used this approach when deciding whether to take action against chief executives of failed banks. However, against mortgage fraudsters and other lower pond-life, the Upper Tribunal has made it clear that the test is whether the individual acted with reasonable care on the balance of probabilities.

    On 1 February 2016, the FCA published a string of agreed Final Notices relating to a horrible insurance scandal inspired by one man, but participated in by a number of approved persons. What can loosely be called the Shay Reches scandal has claimed a number of victims: people who were persuaded by Reches to do irresponsible and often illegal things and who have now been fined and in a number of cases banned from holding significant influence functions within regulated businesses. These cases should provide an important wake-up call to anyone working in a business with a dominant but ethically unaligned boss. When the regulator breaks up the “party”, the person who inspired everything will not be able to provide much protection.

    The Aderia saga

    Introducing Shay Reches

    The Aderia saga needs telling carefully but it is a good example of either phenomenon. At the heart of all was Shay Reches. His Sinclair reinsurance company was found trading without a licence in British Columbia and five US states, each of which served “cease and desist” orders on both Reches and his company. He was never approved or going to be approved by the Financial Services Authority to hold any controlled function. However, he seems to have worked his way into a number of UK authorised firms without this country’s regulator noticing. Reches seems to have been in the habit of buying companies, collecting premiums for insurance and then having these sums paid to Sinclair instead of the insurers concerned. The official excuse was that Sinclair was the reinsurer and the payments were for reinsurance premiums. The overall result was that the insurers all failed.

    Colin McIntosh – £51,600 fine and prohibition order from holding any control function

    Colin McIntosh set up Coverall, an insurance brokerage in 2005 and owned 50% of it. He also created Aderia in October 2010 and was its sole owner.
    However, in early 2011, McIntosh seems to have sold 95% of Aderia to Reches. McIntosh remained a Coverall director and was the primary person responsible at Coverall for Aderia’s activities. At the same time, McIntosh was also the Chief Executive of Milburn, a UK insurer.
    Reches bought 9.9% of Milburn at the end of 2011 and was the majority shareholder of Balva, a Latvian insurer, by December 2012. McIntosh, as the CEO of Milburn authorised Reches on 26 January 2011 to make insurance contracts on behalf of Milburn to bind Milburn to a reinsurance agreement with Balva without prior approval.

    Aderia was the “managing general agent” for an insurer, Balva. It was not an authorised UK firm but it was the appointed representative of Coverall Worldwide Ltd, a UK authorised firm and Milburn. Essentially for policies not issued by Milburn, Aderia was the appointed representative of Coverall while also being the managing general agent for Balva.

    Aderia signed binding authority agreements which authorised coverholders, including Bar Professions Limited, to write Balva general insurance on its behalf. Wayne Redgrave ran “Bar”.

    McIntosh and Robert Bygrave (£37,400 fine and significant influence prohibition order) and the missing client money

    In April 2012, premiums started coming into Aderia from Bar Professions. McIntosh wrongly believed that risk transfer arrangements were in place with Balva which would have prevented this money from being client money. (Under such a contract, the cash on receipt by a broker becomes the insurers.) Premiums were not paid into client accounts. Nor was an equivalent amount maintained in a separate account to represent the premiums less any commission payable. McIntosh had no idea or control over what was coming in and out of Aderia’s accounts. Over £11 million of the £13.2 million paid by Bar Professions, left them in breach of the client money arrangements. Only about £2.2 million made it Balva which might explain the insurer’s financial problems. McIntosh was rightly fined for a breach of APER Principle 7. This requires controlled function holders to take reasonable steps to ensure that the business for which it is responsible complies with the regulatory system.
    Robert Bygrave was fined £37,400 and received a significant influence function ban ostensibly for less than three months as a director of Coverall under APER Principle 6 (failing to manage the business for which he was responsible with reasonable skill). The directorship was actually really that of Aderia and it lasted from 4 July to 23 September 2013. However between July 2012 and March 2013, Bygrave in his role of Head of Finance for Reches’ collection of companies, paid out £9.8 million in client money to Sinclair Insurance Company, Balva’s reinsurer in the Union of Comoros, owned – you guessed it – by Shay Reches.
    Bygrave was warned by auditors of the need to check the risk transfer arrangements but never did. As an accountant, Bygrave’s behaviour was shocking. He made this worse in May 2013 when he told Balva’s insurer that Aderia held money on behalf of Balva which had already been paid to Sinclair. The regulator clearly had some difficulties in identifying exactly what Bygrave failed to do once he had taken on a controlled function. All it could find was a failure to inform himself about the lack of risk transfer arrangement and the obvious financial hole in the books that this created and failed to tell the now suspended Balva that its premiums were no longer being held by Aderia.

    The mysterious reinsurance treaty that never was – McIntosh fined for not being open and co-operative with the regulator

    In July 2012, Reches and McIntosh seem to have been involved in negotiating a reinsurance arrangement between Balva and Milburn. This was in spite of the fact that Milburn did not have authority to enter into such contracts under its UK Part 4A permission.
    The facts described in the McIntosh Final Notice simply do not make sense as regards the date of the purported signing of the agreement. What is significant is that Balva thought that it had a contract duly signed by Reches on behalf of Milburn. It told the Latvian regulator. On 3 January 2013, following a request from that authority, the FCA asked McIntosh to explain how the reinsurance contract was consistent with Milburn’s authorisation. Reches told McIntosh to ask for an extension of time. Instead of telling the FCA what had happened, McIntosh presumably influenced by Reches, just fobbed the reinsurance contract as a draft that was produced by mistake. He omitted any reference to Reches and the fact that Reches had signed the agreement on behalf of Milburn.
    McIntosh’s involvement in producing written drafts of the reinsurance treaty and Reches’ involvement all came fully into focus when Milburn went into administration and the administrators handed over all the e-mail exchanges.
    McIntosh was unsurprisingly fined for a breach of APER Principle 4 for his role at Milburn in hiding from the FCA the way in which he had authorised Reches to sign the reinsurance arrangement and his own involvement in the negotiations. He wrongly told the FCA that there were no written communications between Balva and Milburn about the treaty and omitted completely Balva’s belief that it had valid reinsurance and Reches’ role in everything.

    Balva’s suspension and the insurance switch that went wrong – Andrea Sadler (£18,700 fine and a significant influence prohibition) CEO of Aderia and Wayne Redgrave of Bar professions £38,600 fine

    In July 2012, Colin McIntosh took a back seat and Andrea Sadler, a Coverall Director became the Chief Executive of Aderia, a post she held for the next year. McIntosh failed to indicate to the FCA that he was no longer responsible for Aderia’s activities. He remained officially, the Coverall Director primarily responsible for the oversight of Aderia.
    In April 2013, the Latvian regulator suspended Balva’s licence. Andrea Sadler, the CF1 Director at Coverall Worldwide Ltd with responsibility for Aderia allowed Shay Reches to negotiate a replacement arrangement with Berliner on 15 July 2013 to make Aderia a managing general agent of that insurer.
    Before the agreement was in force, Andrea Sadler signed new binding authority agreements with coverholders such as Bar Professions authorising these businesses to write insurance on behalf of Berliner. At the time, neither Aderia nor Coverall had any authority from Berliner to hand onto the coverholders. Nevertheless, Coverall was authorising Bar Professions to write business with Berliner up to an annual premium income limit of £50 million. This agreement was negotiated by Reches while he was apparently trying to arrange an investment in and a managing general agent agreement with Berliner.
    Bar Professions then wrote to 1300 customers with Balva policies suggesting that they cancel the contracts and replace them with Berliner policies for the rest of the 2012/2013 year and Bar would be “including an automatic extension to the policy effective 1st October 2013 to either 30th September 2014 or 30th April 2015”. The letter asserted that Balva had been temporarily suspended and that Bar had made separate arrangements with Berliner which had agreed to honour all previous Balva quotations. The last point was definitely not true as of early June 2013 when the letter was sent.
    This letter with its comments of reassurance about Berliner was to land Redgrave as Bar’s controller and director in serious trouble. It was inaccurate and constituted advice to recipients to switch their insurance to Berliner. This was not good advice in the light of the fact that there was no agreement with Berliner in place and the underwriting capacity ultimately offered was inadequate.
    More generally, Redgrave had failed to do appropriate due diligence on the new arrangement that he was now recommending. He had failed to see a copy of the Berliner agreement which did not exist or to check the annual premium limit. Redgrave had again been dealing almost exclusively with Reches, a man lacking FSA/FCA approval. Due diligence was obviously necessary after the failure of Balva, another company that Reches had introduced to Bar. All this earned Redgrave a Principle 6 fine for not using reasonable care to manage his business properly.
    At a 20 June 2013 Board meeting, it was stated that there was no agreement for Aderia to represent Berliner. McIntosh was present. The FCA found him to have breached APER Principle 1 (integrity) by doing nothing to alert the coverholders including Bar Professions about this rather obvious hole in their authority to write Berliner policies.
    Unfortunately, the Berliner agreement when it was signed on 15 July 2013 only provided an annual premium income limit of £5 million even though it was retrospective. Two days after seeing this letter, Mrs Sadler wrote to coverholders such as Bar still suggesting the transfer of insurance from Balva to Berliner in spite of the obvious mismatch between the two annual premium income limits. There was insufficient underwriting capacity for Bar to institute the switch of policies and then offer the following year’s cover. If the switch went ahead, the other coverholders would have had no underwriting capacity at all in that their policies would have been invalid as being beyond the contract between Aderia and Berliner.
    Reches was trying to buy into Berliner while negotiating the new managing general agents’ agreement on behalf of Aderia with that insurer.
    It is not difficult to see how Andrea Sadler ended up being fined for a breach of APER Principle 6 here. This required her to show reasonable skill in managing the business of the firm for which she was responsible in her significant influence function. She had authorised coverholders to write insurance without knowing whether her firm had the power to do this and even after she saw the agreement which made it clear that she had authorised coverholders to sell insurance with Berlin well in excess of their authority to do so. Sadler avoided Principle 1 problems by claiming ignorance of the fact that no contract was in force with Berliner when she signed the relevant documents.
    The part of the business that Aderia transacted on behalf of Coverall was definitely part of Sadler’s responsibility. She allowed the key negotiation to be run by Reches who was not approved by the FCA. He was negotiating with Berliner in a classic conflicted position in view of his desire to buy shares in Berliner. He was also the guiding force in the replacement of the original coverholder arrangements with Balva.
    McIntosh, presumably as the more powerful individual in both Coverall and Aderia and the CEO of the latter prior to July 2012 was also hauled over the coals by the FCA for failing to establish any systems and controls over Aderia or arrangements for the provision of management information from Aderia to Coverall. McIntosh was more heavily involved in giving powers to Shay Reches. In 2010, he had authorised Reches to sign insurance documents on behalf of Aderia.

    Bringing it all together

    It is extremely depressing to see how many approved persons fines have at the root a dominant personality leading others to a place where they should never have gone. The Final Notices make clear the FCA’s view that Andrea Sadler in particular was heavily under Shay Reches’ control. It is hard to understand how an accountant such as Bygrave ends up as the financial controller of Reches’ group and then making payments out of client money to Reches’ tame reinsurer. It is difficult to work out the extent to which McIntosh was under Reches’ spell or was just his willing assistant. The former’s economy with the truth over the reinsurance treaty when dealing with the regulator would normally result in a full industry ban. In truth, it suited Reches Latvian interest to have the treaty in existence and his UK interest for it not to exist.

    General insurers are usually quite low on the FCA’s radar screen. However, this particular mess has resulted in two UK and one Latvian insurer failing and a number of intermediaries ending up in serious trouble. McIntosh was reasonably criticised for his failure to impose any controls over Aderia. One would like to think that the regulator is right now asking itself how it failed to spot so many UK-authorised firms falling under the spell of an unapproved rogue such as Reches.

    About the author: Adam Samuel is a lawyer and compliance consultant and the author of the only major book on financial services complaint handling. He combines diploma level qualifications with the CII, a complete set of certificate level CII exams, the CISI Diploma in Compliance with merit with his background as a barrister and attorney. Formerly the second PIA Ombudsman and an IOB Ombudsman's Assistant, Adam sits on the Ethics Committee of the Institute of Financial Planning and sat for seven years on the Practice and Standards Committee of the Chartered Institute of Arbitrators of which he was also the chairman of the Arbitration Sub-Committee for four and a member for ten. Adam is a regular contributor to Wolters Kluwer Financial Services’ Compliance Resource Network.

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