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FSA/PN/130/2005
02 December 2005

The Financial Services Authority has obtained undertakings from two former London market reinsurance brokers that they will not undertake any function in relation to any regulated activity for two years. Whilst working for Benfield Limited the individuals were involved in designing and placing a Loss Portfolio Transfer (LPT) contract which was used by their client to distort its financial position.

The FSA considers, and the individuals accept, that with the benefit of hindsight and more recent focus on and awareness of the potential misuse of alternative risk transfer (ART) products, their conduct did not meet an appropriate standard.

Mr Robert George Phillips and Ms Isabel Rawlence were involved in the design and placement of an insurance contract on behalf of Chiyoda Fire and Marine Insurance Company (Europe) Limited (CE). The contract was used by CE as part of a wider plan enacted by senior employees to deceive CE's auditors as to the extent of its losses. It also led to inaccurate reporting of its financial position by CE to the FSA.

Mr Phillips and Ms Rawlence state that they did not know that the purpose of the contract was to obscure the financial position of Chiyoda Europe.

Margaret Cole, FSA Director of Enforcement, commented:

"The conduct of these individuals was inappropriate. In addition they failed adequately to question the conduct of senior employees at their client.

"Financial reinsurance should only be used where there is a legitimate commercial purpose and proper disclosure. In this case the FSA considers that there were indications that part of the contract placed by the two brokers was not transparent and did not involve any transfer of risk. The FSA will not hesitate to take robust action against anybody that undermines confidence in the financial system."

Mr Phillips and Ms Rawlence placed a legitimate LPT contract for CE. Whilst doing so, they were involved in the inclusion of a supplemental payment of £5m. This was to be paid via the LPT reinsurer to a third party insurer as payment for what had effectively been a loan to CE's parent (the individuals say they did not know the purpose of the payment). This supplementary payment was not transparent and did not involve any transfer of risk despite being treated as premium. They also explored the possibility of an additional quota share contract which would have lacked transparency and the transfer of risk required in a reinsurance contract had it proceeded.

The FSA confirms that no investigation has been commenced in relation to Benfield Limited or any Benfield Group company.

Notes for editors

1. The 'FSA Public Statement on the Broking of ART Insurance' can be found on the FSA website.
2. The FSA assumed its powers for the regulation of insurance intermediaries on the 14th January 2005. The FSA will accept undertakings in appropriate circumstances instead of seeking to prohibit individuals from the industry.
3. Neither Mr Phillips nor Ms Rawlence is currently employed by Benfield Limited.
4. A LPT is an agreement by which one reinsurer transfers to another a liability for outstanding losses for a consideration. A quota share agreement is an agreement by which a reinsurer agrees to accept a proportion of the losses of the ceding insurer in return for a consideration.
5. The FSA has already banned six of the directors of Chiyoda Fire and Marine Insurance Company (Europe) Limited and its Japanese parent. The press release announcing this decision can be found here. Chiyoda group has since merged with another Japanese insurer.
6. The FSA confirms that it has made no findings of misconduct in relation to the LPT counterparty or the third party insurer.
7. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
8. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.