At the 2024 MGAA Conference, regulation was under the microscope with the FCA’s Lisa Sturley delivering a market update and Brown & Brown’s J Powell Brown sharing that his biggest surprise on expanding into the UK had been the amount of regulation here versus the United States.
Given the complexity of today’s regulatory landscape, it’s no wonder that regulation so often ranks among the top challenges facing managing general agents (MGAs). But beyond Consumer Duty (which has now welcomed its first anniversary), change in controls, and financial reporting, an area of growing concern is around the regulatory exposure of MGAs operating in the UK without capacity. It’s a worrying practice, according to William Reddie (pictured), partner at HFW, not least because many MGAs do not understand its full regulatory repercussions.
“It’s a fundamental principle of regulation that you can’t carry out activities that are regulated unless you’ve got authorisation to do so, or are exempt or excluded in some way,” he said. “Those exclusions and exemptions are deliberately narrow, they’re not designed to be easy to fall into.”
The starting point is the need to be authorised to carry out regulated activities, which is clear and straightforward when it comes to setting up an insurance company in the UK. Where it becomes more complicated for MGAs is when the insurer is based overseas, as both the insurer and the MGA may not be aware of the need to be authorised in the UK. “The problem is that the UK regulated on the basis of activities,” he said. “So, are you doing an activity in the UK? Also, what constitutes doing an activity here is not as straightforward as just physical location.
“The key point of regulation here is that someone else’s activities, as in someone acting as your agent, can bring you within the scope of regulations. That means an MGA that’s acting as the agent of an overseas insurer can bring the overseas insurer onshore in the UK.”
Despite being a long-established principle, it’s not a well-publicised one for a number of reasons. Firstly, it’s an old point of law, so it’s not often discussed in the market. In addition, the onshore/offshore differentiation is quite a complicated legal concept which brings with it some grey areas regarding which activities are onshore or offshore. These factors, combined with the fact that the regulators aren’t shining too much of a spotlight on the issue, means it’s a risk that’s flying under the radar for some organisations.
What a lot of MGAs don’t understand is the regulatory ramifications of operating in breach of UK regulations. “When you carry on a regulated activity without the right authorisation, that’s a criminal offence,” he said. “It could be the overseas insurer itself that’s liable to sanctions, but also its directors. As well as that, you could aid and abet the criminal offence. For example, the MGA could aid and abed the insurers’ criminal offence of carrying on a regulated activity without authorisation. It’s potentially very serious and it is something that the regulators in principle would be very worried about.”
Addressing what MGAs can do to mitigate their exposure to this risk, Reddie advised that companies should first check whether their insurer is authorised in the UK. This can be done by searching the Financial Services Register. If they aren’t and they need to be – which is very likely if they’ve granted an MGA a binding authority – then the MGA should look to a fronting solution. “That means speaking to a UK-authorised insurer, who will sit between the overseas capacity and the MGA, entering into the binding authority agreement with the MGA, and then reinsuring its liability to the overseas insurer.”
This ensures that the MGA can achieve the desired outcome of having the overseas insurer take on most, if not all, of the risk without carrying on activities in the UK without authorisation. “You would then make sure, in turn, that the insurer fronting in the UK and the overseas insurer have set up their reinsurance outside the UK so that the reinsurer – as it becomes – isn’t carrying on unregulated activity in the UK. But that’s straightforward to do.”
For Reddie and his team at HFW, helping to make the MGA market more aware of the issue as it exists and what they do to mitigate it is top of the agenda at the moment. The team gets a lot of questions seeking perimeter advice or guidance, regarding whether UK authorisation is required. This tends to be from intermediaries rather than insurers because it’s usually clear that if an insurer is set up in the UK then they need to be authorised there, while it’s less clear-cut for intermediaries.
His key recommendation for MGAs is simple – “ask the question”. It’s significantly more efficient and effective to identify the issue as early as possible and make the moves to resolve it than to be unaware of your exposure or to keep quiet about it in the hope nobody will notice it. “It’s always better to solve something with lawyers before the regulators find it. It’s quicker, it’s less expensive, it’s less time pressured and there’s less stress for management.
“Once the regulator becomes involved and starts asking questions, you’ve got a type of scrutiny that you don’t want on your business which can extend into other parts of your business. It’s a lot of unwelcome attention and it’s often under great time pressures.”
