Why MGAs using overseas capacity is a growing concern and what can be done about it

HFW’s Will Reddie and Bob Haken on some of the challenges MGAs can face when using overseas capacity.

Concerns have recently been raised that some UK MGAs could be using overseas capacity providers in breach of UK law and regulation.

The principles in this area are well-established in law but are not necessarily widely known or publicised in the market.

The consequences of acting in breach of the relevant laws and regulations are serious, but there are relatively simple steps which MGAs can take to avoid issues or, if necessary, remedy potential breaches.

Legal and regulatory position

The concerns which have been raised are that overseas insurers could be carrying out regulated activities in the UK without having obtained authorisation from the UK financial regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

This is a potentially serious breach of regulation, as carrying out regulated activities without authorisation is a criminal offence, and one for which both the insurer in question, and its directors, can be prosecuted. In the majority of cases, it will be clear to an insurer that it will or will not be operating in the UK, and that it will or will not need to obtain authorisation before commencing the relevant activities.

However, certain grey areas exist where an insurer is physically located outside the UK. Legal advice should be obtained in these circumstances, as the position can be very fact-specific and can turn on factors such as whether and how often employees visit the UK, what they do in the UK, and what contractual relationships the insurer has with counterparties in the UK.

However, one clear-cut principle is that the activities of an agent in the UK will bring its overseas principal onshore in the UK.

In the situations that have recently been flagged, the agent is the MGA and the overseas principal is the insurer which has appointed it pursuant to a binding authority agreement or similar contract.

The effect of this principle is that an overseas insurer which appoints an MGA to distribute policies on its behalf in the UK is (subject to limited exceptions) highly likely to require authorisation from the PRA and the FCA.

Rectification of issues

In simple terms, an MGA should be identifying whether its capacity providers are authorised by the PRA and the FCA.

If they are not, an MGA would need either to establish that the capacity providers do not require that authorisation, or rectify the situation.

While it is principally an issue for the capacity provider(s) in question if they are carrying out regulated activities without authorisation, an MGA which participates in a non-compliant structure could be regarded as aiding and abetting the criminal offence.

In other words, no MGA should turn a blind eye to a capacity provider's regulatory status. A simple way for an MGA to rectify a potentially non-compliant structure would be to assist the capacity provider(s) with finding a fronting insurer which is authorised by the PRA and FCA and which is willing to provide capacity to the MGA and be reinsured by the overseas insurer(s).

Fronting arrangements are common in the market, both in the UK and around the world, and it is relatively straightforward to establish a compliant structure.

In simple terms, the key is to ensure that the activities of the overseas insurer(s) under the reinsurance agreement with the fronting insurer are kept outside the UK, to ensure that the overseas insurer(s) do not need to obtain UK authorisation.

Speed of action

It is vital that potential breaches are identified and remedied rapidly. First, as mentioned above, a breach would be a criminal offence, and subject to sanction if the situation came to the attention of the UK regulators and/or courts. Secondly, the recent publicity given to this issue may not just increase the likelihood of regulatory scrutiny, but also increase the demand for fronting insurers.

If only a limited number of insurers are willing to front UK business, it will be the MGAs which act most speedily which are able to secure that capacity. Other MGAs will potentially be left without capacity and unable to write the business in question.

This is a situation we have already seen in practice this year, where a fronting insurer could not be found for business at renewal, resulting in the MGA being unable to continue writing the business.

That is not a situation any MGA would want to be in, not least if it is the result of failing to implement a relatively straightforward solution to an admittedly complex legal and regulatory situation.

Will Reddie and Bob Haken are partners at HFW