UK

FSA Rule Changes Bar Insurance Against Regulatory Fines

Joanna Gray, University of Newcastle upon Tyne

Background to rule change

In July last year the FSA consulted upon changes it had proposed to parts of its Handbook of Rules and Guidance which would have the effect of prohibiting any authorised person from entering into, arranging, claiming on, or making a payment under, a contract of insurance that would pay all or part of a financial penalty imposed by the FSA under the Financial Services and Markets Act 2000. Given the range of matters in respect of which the FSA now has power to impose as a result of the broadening and strengthening of its remit as result of that Act, the potential impact on those firms and individuals within the financial services industry and potentially at risk of such regulatory fines is significant. The FSA’s reasoning in proposing these changes is clear enough. The objective is to ensure that the teeth of the disciplinary and enforcement regime remain sharp and simply to ensure that, as the FSA put it, “…our fines are paid by the person on whom they are imposed.” (FSA Consultation Paper 191 July 2003) The proposal was never planned to prohibit indemnity insurance against the costs of defending the FSA enforcement action. Neither would it prohibit insurance against the funding of any compensation or redress that the authorised firm eventually has to pay, nor indeed any fines imposed by other regulators. The way in which the proposed rules would operate would reach out to both potential insureds and potential insurers (for the prohibition would extend to Lloyd’s members too).