The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)
Global Insurance Group Limited (“GIGL”)
Christopher Schofield (“Mr Schofield”)
Andrew William Robert (“Mr Robert”)
On 8 June 2020, the Guernsey Financial Services Commission (the “Commission”) decided:
1. To impose a financial penalty of £42,000 under section 11D of the Financial Services Commission Law on GIGL;
2. To impose a financial penalty of £17,500 under section 11D of the Financial Services Commission Law on Mr Schofield;
3. To impose a financial penalty of £10,500 under section 11D of the Financial Services Commission Law on Mr Robert; and
4. To make a public statement under section 11C of the Financial Services Commission Law.
The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that GIGL had materially contravened the Insurance Law and that GIGL, Mr Schofield and Mr Robert failed to fulfil the minimum criteria for licensing under Schedule 7 to the Insurance Law.
GIGL is a Guernsey company incorporated on 21 December 2011. GIGL was licensed to conduct general insurance business by the Commission on 25 January 2012. GIGL provided medical health insurance products to expatriate individuals and companies employing expatriates around the world.
Mr Schofield has been a director of GIGL since 22 December 2011. Mr Robert was a director of GIGL from 21 December 2011 to 14 July 2017.
Under an agreement between GIGL and a United Kingdom intermediary (which had some common ownership with GIGL) (“Intermediary A”), Intermediary A issued insurance policies on behalf of GIGL. Intermediary A was also able to collect premiums from policyholders on behalf of GIGL and retain a portion of the premiums as a loss fund to pay claims on behalf of GIGL (“the Claim Fund”). Bordereaux reports (a list, or summary, of policies issued and premiums charged and/or claims paid) should have been prepared monthly by Intermediary A and net premium settlements made quarterly to GIGL.
The Commission conducted a risk assessment visit to GIGL in July 2017 (“the July 2017 Visit”). As a result of the July 2017 Visit, the Commission had concerns over GIGL’s oversight of functions outsourced to Intermediary A, in particular the management of the Claims Fund. The Commission also found that GIGL had not conducted any audit of the activity carried out by Intermediary A and could not adequately monitor the solvency of GIGL due to the frequency of reporting from Intermediary A.
As a significant part of GIGL’s business was outsourced to Intermediary A and (as GIGL could outsource functions but not responsibility) it was an important function of GIGL to oversee the functions outsourced to Intermediary A, including that the reporting from Intermediary A was accurate.
Mr Schofield and Mr Robert confirmed to the Commission that no visits to Intermediary A were made for the purposes of checking the accuracy of the reporting to GIGL by Intermediary A prior to the July 2017 Visit. In addition, no documentation was provided to the Commission that showed that such checks were being undertaken. Mr Schofield and Mr Robert told the Commission that GIGL took the information provided by Intermediary A at face value and that GIGL relied on the GIGL directors who were also directors and/or shareholders of Intermediary A to raise issues.
As a result, GIGL failed to establish, and operate within, effective systems of risk management and internal controls and failure to retain at least the same degree of oversight of, and accountability for, any outsourced material activity or function (such as a control function) as applies to non-outsourced activity. Therefore GIGL breached (i) Principles A:10 and A:16 of the Code of Corporate Governance from 1 April 2016; and (ii) prior to 1 April 2016 paragraphs 2(h) and 3(b) of the Licensed Insurers Code of Corporate Governance. GIGL also failed to fulfil the minimum criteria for licensing set out in paragraphs 1(2) and 6(1) of Schedule 7 to the Insurance Law.
In the period prior to the July 2017 Visit, apart from the first quarterly payment to GIGL by Intermediary A, the only payments made were the exact amounts required to pay GIGL’s reinsurers. GIGL’s management accounts showed that the amounts outstanding from Intermediary A grew whilst GIGL’s cash remained low. The amounts due from Intermediary A were GIGL’s major asset.
GIGL began to request that the payments be regularised from November 2015 onwards. However, regular payments from Intermediary A were not forthcoming. The outstanding amounts were only paid to GIGL after intervention by the Commission and after investment into Intermediary A by a third party. This called into question the liquidity of GIGL’s major asset.
As a result, GIGL failed to maintain adequate liquidity or make adequate provision for depreciation or diminution in the value of its assets (including provision for bad or doubtful debts). Therefore, GIGL failed to fulfil the minimum criteria for licensing set out in paragraph 6(1) of Schedule 7 to the Insurance Law.
The amounts due from Intermediary A were deemed to have been outstanding for more than 90 days as at 30 April 2017 and 30 April 2018. This resulted in these amounts attracting a capital factor of 100% under the Insurance Business (Solvency) Rules, 2015 (“the Solvency Rules”) (i.e. in effect they are ignored as an asset in calculating whether GIGL complied with solvency requirements). As a result, as at 30 April 2017 and 30 April 2018 GIGL failed to hold regulatory capital resources greater than or equal to its Prescribed Capital Requirement in breach of paragraph 9 of the Solvency Rules. GIGL also failed to fulfil the minimum criteria for licensing set out in paragraphs 1(2) and 6(1) of Schedule 7 to the Insurance Law. In addition, GIGL failed at all times to maintain capital resources in accordance with rules of the Commission in breach of section 30(1) of the Insurance Law.
GIGL failed to deposit the annual return, accounts and audit report for the periods ending 30 April 2015, 30 April 2016, 30 April 2017 and 30 April 2018 within a period of four months beginning on the close of the financial year to which the accounts relate in breach of section 37(1) of the Insurance Law.
The significant amount of activity carried on by Intermediary A, the lack of oversight of this activity by GIGL and the lack of cash flow into GIGL brings into question whether there was any substance to the activity of GIGL within the Bailiwick.
As a director of GIGL, Mr Schofield failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.
As a director of GIGL, Mr Schofield also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.
Mr Schofield prepared a risk register on behalf of GIGL in October 2016, which was subsequently considered by the board of GIGL. Credit risk, which was defined as financial loss through counterparty failing to meet obligations, was deemed to be low likelihood and medium impact by Mr Schofield.
Mr Schofield also prepared a risk assessment of outsourced activity in May 2018, which was again considered by the board of GIGL. Again, credit risk was deemed to be low likelihood and medium impact.
Given the issues that had been ongoing since November 2015 regarding the payments due from Intermediary A, that Intermediary A was GIGL’s largest debtor and that Mr Schofield subsequently told the Commission that the board had increasing concerns about the repatriation of funds during 2017 to 2018, this is surprising. As a result, Mr Schofield failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL.
The failures by Mr Schofield outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Schofield and as a result Mr Schofield failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.
During his time as a director of GIGL, Mr Robert failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.
As a director of GIGL, Mr Robert also failed to ensure that the amounts due from Intermediary A were paid to the Licensee in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.
Mr Robert failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL despite the issues that were occurring with Intermediary A’s failure to pay at the time of his consideration of the risk assessment prepared by Mr Schofield in October 2016.
The failures by Mr Robert outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Robert and as a result Mr Robert failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.
GIGL had more than 2,000 policyholders around the world and the lack of adequate capital and liquidity could have seriously put at risk the payment of claims to these policyholders and therefore posed a risk to the reputation of the Bailiwick.
Mr Robert made efforts to raise the issues during his time as a director (and subsequently). In addition, Mr Robert raised with the board of GIGL the fact that GIGL continued not to receive quarterly settlements despite the request to regularise payments in November 2015.
Mr Schofield made extensive efforts to rectify the breaches following the July 2017 Visit. This included recommending to the GIGL board in June 2018 that it cease underwriting new insurance business.
GIGL is no longer writing insurance business and has paid all known outstanding claims.
The Commission is not aware of any policyholders not being paid due to the lack of liquidity within GIGL.
GIGL, Mr Schofield and Mr Robert have been open and co-operative with the Commission since the issues were identified.
GIGL, Mr Schofield and Mr Robert accepted the findings against them and agreed to settle at an early stage. This has been taken into account by applying a 30% discount in setting the financial penalties imposed.