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FSA/PN/127/2007
14 December 2007

The Financial Services Authority (FSA) has prohibited John Hubert Whitcombe, Jeffrey Ronald Butler, Nicholas Brown and Christopher Reginald Colin Henton for their dishonest involvement in reinsurance business that funnelled very significant losses into Sphere Drake Insurance Limited (Sphere Drake).

Mr Henton and Mr Whitcombe were underwriters and Mr Brown and Mr Butler were brokers. Working together in the 1990s they wrote reinsurance business under a binding authority granted by Sphere Drake. They deliberately did not disclose that the business being passed to Sphere Drake was "gross loss making business" that would inevitably result in losses for Sphere Drake. Sphere Drake received claims in excess of $250m as a result of 112 contracts passed to it via the firms for which the four men worked.

All four were defendants in a court case brought by Sphere Drake in 2003. Findings of dishonesty were made against the four and Mr Justice Thomas also found that they had given untruthful evidence during the course of the trial.

FSA Director of Enforcement, Margaret Cole, said:

"Not only were the four men found to have engaged in dishonest business practices, they were also found to have been untruthful in court. Hiding the true nature of the business passed to Sphere Drake led to the firm suffering heavy losses on the business that it wrote.

"Based on the findings of the court, we have banned the four. Their behaviour both in their work and the subsequent trial has fallen a long way short of the standards that we expect of FSA approved persons."

The business in which the men were involved entailed placing business with a reinsurer for a premium that was far lower than the expected losses. The premium was sufficient to pay for the reinsurer's own reinsurance cover (retrocession), pay a small portion of each loss and make a small profit. As the business was passed from reinsurer to reinsurer in this way it created a spiral of losses. Mr Justice Thomas described the practice as "pass the parcel" or "Russian roulette by proxy".

When heavy losses arose in the underlying business (US Workers' Compensation Insurance), some reinsurers, such as Sphere Drake, found themselves facing far greater losses than they had expected. Mr Justice Thomas said that the market trading in losses was one "in which no rational and honest person would participate".

The FSA launched this enforcement action after it took on the regulation of insurance brokers in January 2005.

Notes to editors

1. The Final Notices for all four individuals can be found on the FSA website (see notes 3 & 4). Mr Henton challenged the FSA's decision in the Financial Services and Markets Tribunal. The Tribunal's decision can be found on their website.
2. The original findings against the four individuals were made in the judgement of Mr Justice Thomas in the case of Sphere Drake Insurance Limited & Anr v Euro International Limited & Ors [2003] EWHC 1636 (Comm).
3. Mr Brown and Mr Butler worked for Stirling Cooke Brown Insurance Brokers Limited (now in administration) and Stirling Cooke Brown Reinsurance Brokers Limited (now in liquidation).
4. Mr Henton and Mr Whitcombe worked for Euro International Underwriting Limited (which was dissolved on 14 September 2004). The firm held a binding authority for Sphere Drake which is an arrangement that allowed the firm to accept insurance risks on behalf of Sphere Drake.
5. The FSA regulates the financial services industry and has four objectives under FSMA: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
6. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.