29 October 2009

Art and cultural assets news – autumn: Arranging all risk insurance in the UK


In January 2005, the scope of the UK Financial Services and Markets Act 2000 was widened to require businesses arranging insurance for others to be authorized by the Financial Services Authority (FSA). FSA rules on insurance mediation are not aimed just at insurance brokers. They are aimed at any business handling insurance on behalf of clients.

It is not uncommon for auctioneers and art dealers to arrange insurance of clients’ property. Depending on how these arrangements are made, the auctioneer or art dealer may commit a criminal offence and risk having to return insurance fees paid by clients if he is not FSA authorized to conduct insurance mediation activity.

Regulated Activities

Any person who carries on a regulated activity in the UK by way of business must either be authorized by the FSA or exempt from the need for authorization. ‘Regulated activity’ now extends to certain pre-contractual and post-contractual activities related to general contracts of insurance (e.g. contracts to insure property against loss or damage and during transportation). You may require authorization if you carry on a regulated activity even if you are not insuring property yourself or acting as an insurance broker.

Since 14 January 2005, you may require FSA authorization if you:

  • introduce a client to an FSA authorized broker or insurer,
  • propose an insurance policy to a client,
  • advise on the merits of a policy,
  • carry out work preparatory to the conclusion of a contract of insurance or participate in the conclusion of such a contract, for example, if you wish to be able to complete proposal forms for clients, or
  • assist in the administration and performance of an insurance contract, especially if you are involved in the settlement of insurance claims (e.g. you assist a client in completing a claim form).
  • The need for FSA authorization applies to businesses established outside the UK if they carry on a regulated activity in the UK or their clients are in the UK.

By Way of Business

These activities are regulated if they are carried on ‘by way of business’. There is no clear definition of what this means. Several factors are likely to be taken into account, such as the frequency with which the firm deals with insurance, the degree of continuity in doing so and the proportion that any insurance work bears to other business activities.

A person is regarded as providing insurance-related services by way of business if he provides those services for remuneration. Remuneration does not have to be identified separately (e.g. a separate fee for arranging insurance) or attributable to insurance-related activities. You will be deemed to have received remuneration if a charge for insurance-related activity is included in your sale commission. Remuneration can also be indirect and the FSA has suggested that it can take the form of almost any economic benefit to the firm. For example, if you paid discounted premiums for your own business in return for bringing other business to an insurer, the discount would amount to remuneration.

If a firm does not take or receive any form of direct or indirect remuneration in relation to insurance-related activities, it is unlikely to require FSA authorization. However, whether or not a firm is acting ‘by way of business’ will depend on individual circumstances and specific advice should be sought.

Exclusions

Insurance-related activities are excluded from the scope of the FSA regulations in certain circumstances.

An important, albeit limited, exclusion is available to persons whose principal business is not insurance related. They do not require FSA authorization to provide information about insurance to clients where the provision of information may reasonably be regarded as incidental to their main business. For example, if you are an auctioneer or art dealer, you will not require FSA authorization to name insurance companies specializing in insuring art and to provide their contact details, provided that you do not recommend a particular insurance policy. On the other hand, the exclusion will not apply if you provide an insurer or broker with your client’s contact details as this constitutes an arrangement to introduce which is a regulated activity.

Another exclusion relates to contracts of insurance where the person arranging the insurance is the only policyholder. So arranging your own insurance is not a ‘regulated activity’. This includes arranging to cover property held in trust, on consignment or commission or for exhibition, provided that you are the only policyholder. However, the FSA considers that if a firm arranges for another person to become a policyholder under its own insurance contract, the exclusion will not apply. This may be the case if, for example, the client requires that you arrange for him to be named as additional insured on the policy. In other words, you should not arrange for a client to benefit from your own insurance policy unless you are FSA authorized.

Uncertainty

The rules on insurance mediation are complex and subject to interpretation. It may be difficult to decide at first if a specific activity requires FSA authorization or not. Some cases may be clear cut but in the absence of conclusive guidance, in many instances, it will be a matter of judgment. Each situation should be considered individually and it cannot be excluded that an insurance-related activity carried out in one context will require FSA authorization when the same activity conducted in a different context will not.

Sanctions

If you are neither FSA authorized nor exempt and you carry on a regulated insurance-related activity in the UK or agree to do so by way of business, the sanctions could be severe. A fine and/or a prison term of up to two years may be imposed. Furthermore, the insurance arrangement will be unenforceable against the client who is entitled to recover any money paid under the arrangement in addition to payment of compensation for loss.