Public Statement concerning the imposition of a Civil Penalty under section 37 of the Insurance Act 2008 – Kestrel Insurance Services Limited
Kestrel Insurance Services Limited (“Kestrel”)
1. Action and reasons for a public statement
1.1 The Financial Services Authority (the “Authority”) makes this public statement in accordance with powers conferred upon it under section 35 of the Insurance Act 2008 (the “Act”).
1.2 The reason for the Authority issuing this public statement is that the Authority is satisfied that Kestrel has acted in contravention of the Act and the Insurance Intermediary (General Business) Regulations 1999 (“the IIR”) as detailed further below.
1.3 This action supports the Authority’s statutory objectives of securing an appropriate degree of protection for policyholders, reducing financial crime and maintaining confidence in the Island’s financial services and insurance & pensions industries.
1.4 A regulatory inspection at Kestrel by the Authority identified a number of regulatory failings and the Authority has deemed it necessary and proportionate in all the circumstances, that Kestrel be (a) issued with a discretionary civil penalty under section 37 of the Act in the sum of £82,753 discounted by 30% to £57,927 and (b) subject to further regulatory requirements as set out below.
1.5 The level of the financial penalty reflects the fact that Kestrel co-operated with the Authority and agreed settlement at an early stage, employing the Authority’s new Enforcement Decision-Making Process.
1.6 The aforementioned penalty fell into Level 1 as detailed in the Financial Services (Civil Penalty) Regulations 2015 (which discretionary civil penalty regime was applied by way of comparison to this case with the agreement of Kestrel) demonstrating that these were organisational failings as opposed to any individual wrongdoing. However, Kestrel’s three directors during the relevant time period (Alan Burrows, Kate Burrows and Paul Coniglio-Burrows) fully accept their overall responsibility for the failings identified.
2.1 Kestrel is registered by the Authority in accordance with section 25 of the Act to undertake general insurance intermediary business.
2.2 In 2018, Kestrel was subject to a supervisory inspection by the Authority in accordance with its lawful powers under Schedule 5 to the Act. This inspection identified several material failings. Through a period of remediation including the engagement of professional advisors, Kestrel has rectified the majority of these failings and continues to take further necessary measures to enhance its governance.
2.3 Upon identification of the issues in 2018, the Authority identified a need to formally investigate whether Kestrel continued to satisfy the Authority that it is ‘fit and proper’ to hold a registration under section 25 of the Act. To register, an insurance intermediary must satisfy the Authority, inter alia that it is a fit and proper person and its controllers, directors and chief executive (if any) are fit and proper persons. This ‘test’ is an initial test at registration and an ongoing one.
2.4 At an early stage of its investigation, the Authority entered into settlement discussions with Kestrel in line with the Authority’s Decision Making Process.
2.5 The regulatory inspection of Kestrel identified a range of issues that, prima facie, brought into question Kestrel’s fitness and propriety. Amongst those matters of concern were: -
- Operation and oversight of its client money account in a manner contrary to Paragraph 4(i) of Schedule 3 to the IIIR.
- Policy premium refunds properly due to and payable to clients were not processed in a timely manner contrary to Paragraph 4(i) of Schedule 3 to the IIR.
- Policy premium refunds properly due and payable to clients were held in a non-client money account where, on occasions, the client could not readily be contacted. Such practice is contrary to the IIR.
- The filing of inaccurate annual registration declarations.
- Politically exposed persons not properly identified or risk assessed in contravention of paragraph 14 of the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 (“the Code”).
- By adopting the UK AML/CFT framework, Kestrel could not demonstrate that it had paid proper heed to the Isle of Man legislation on that subject in contravention of paragraph 31 of the Code.
- Failure to record proper business, customer and technological developments risk assessments in contravention of paragraphs 6, 7 and 8 respectively of the Code.
Measures taken by Kestrel
2.6 Since the 2018 inspection, the Authority has been made aware by Kestrel of a range of measures it has undertaken and continues to work on to address the matters identified by the Authority. These measures, undertaken in conjunction with professional third parties, are comprehensive and intended to enable Kestrel to operate according to the high standards expected of regulated entities in the future.
2.7 Included within the remediation is a strengthening of Kestrel’s staffing and governance arrangements.
2.8 Kestrel has taken significant steps since 2018 to prevent any re-occurrence of the issues identified.
2.9 Kestrel states, “It is entirely accepted by Kestrel that some of its practices were in breach of the Regulations whilst others may have fallen short of what the Authority reasonably requires of persons regulated by it. Kestrel regrets its actions and omissions in this respect, and fully accepts that it bears responsibility in respect of the same. Kestrel has, since the Authority’s inspection in 2018, fully cooperated with the Authority both as to (a) the provision of information and documentation and (b) the review of and improvement to various processes. Further improvements are being made in the areas of staffing and governance. As a mark of Kestrel’s commitment, Kestrel has proposed to instruct independent third parties to validate the robustness of the measures taken. Kestrel continues to improve and evolve in all these areas and such offer has been accepted by the Authority.”
3.1 Despite the regulatory issues identified by the Authority, as a result of the extensive remedial work undertaken since the 2018 inspection, Kestrel has satisfied the Authority that its registration should not be cancelled at this time.
3.2 As well as the civil penalty, the Authority has imposed a requirement on Kestrel to strengthen its staffing and governance arrangements and to produce an independent report confirming the changes implemented to its handling of client monies.
3.3 The Authority believes that this public statement will encourage others to comply with the legal and regulatory obligations that are fundamental to the conduct of business in the regulated sector.
4. Cooperation and Remediation
4.1 The Authority is satisfied that Kestrel cooperated fully during the entire process and engaged proactively with the Authority’s regulatory enforcement action. The Authority is also satisfied that Kestrel engaged in the Authority’s new Decision-Making Process and settlement procedure at the earliest possible opportunity.
5. Key Learning Points for Industry
5.1 The correct treatment of client money and the correct operation of the client money account is ‘sacrosanct’. Adherence to regulatory requirements is a fundamental requirement if you wish to operate a business in the regulated sector.
5.2 The safeguards around client money and the client money account that are embedded within the regulatory requirements are fundamental to two of the Authority’s statutory objectives – securing an appropriate degree of protection for customers and the maintenance of confidence in the Island’s financial services, insurance and pensions industries.
5.3 The Authority expects the board of a regulated entity to ensure that the business has the appropriate approach to governance and compliance arrangements and that a culture of good governance and compliance pervades throughout the business.