THE collapse of insurance broker Andrew Reynolds and Associates, following after the collapse of the Taylor Group, has intensified concerns about the adequacy of legislation covering the industry and the regulation of participants.
ARA was a general insurance broker. The company is now in liquidation owing £1.5 million to creditors. The Taylor Group was a life and pensions brokerage and an investment intermediary. Its operations are in liquidation and funds of over £2 million invested by customers are missing.
Because the companies operated in different sectors of the insurance industry they were not covered by the same legislation. ARA was regulated under the Insurance Industry Act 1989 while the Taylor Group came under the Investment Intermediaries Act 1995.
However, a common thread was that both intermediaries were members of the Irish Brokers' Association, a self regulating body. Another common factor was that after the businesses collapsed it emerged that information on their finances required under the agreed code of conduct for the regulation of the industry was so out of date it was effectively useless.
Timely information is crucial to adequate regulation. Under the code of conduct for insurance intermediaries an auditors' report on the accounts and verification that the account (Section 48 account) into which clients' funds must be lodged is in order must be provided by the intermediary to the regulator.
In the case of ARA, the latest information IBA had for the operation covered an 18 month period to end July 1994 - it is believed that these accounts were qualified by its auditors. In formation for the year to end July 1995 had been requested but had not been received.
Explaining its procedures, the IBA said it carries out its annual compliance check in October each year. Intermediaries are asked to submit the required information for the year up to the end of the previous March. ARA's financial year ended in July. The IBA considered it appropriate to accept in October the required compliance data relating to the year ending July of the previous year. IBA is the regulator for 500 to 600 insurance intermediaries. The Insurance Intermediary Compliance Bureau (IICB) - a subsidiary of the Irish Insurance Federation - is the regulatory body for some 2,500 intermediaries who are not members of the IBA. IICB requires the auditors' report and Section 48 account verification within six months of the intermediaries' year end.
Collection is on a rolling basis. A computer list is generated every month of the intermediaries from whom information is due. Intermediaries are given about six weeks to comply. If they fail to provide the information, their "non compliance" is notified to the insurance companies.
It is easy to understand why IICB operates a strict regime - it is run by the insurance companies who stand to lose money if intermediaries fail. But IBA must be asked whether it could not collect compliance information throughout the year in order to ensure its members can be adequately regulated.
IBA may argue that this would require a significant increase in resources. But if the association wants to be the regulator of its members, perhaps it is time it levied those members so that it can upgrade its regulatory procedures.
IBA made a virtue of the fact that no client monies appeared to be lost in the ARA collapse. Under Section 53 of the Insurance Act 1989, when a client has paid an insurance premium to an intermediary the client will be covered.
It is, of course, a good thing that businesses and individuals who have paid for insurance will not lose out. But it would be naive to think that insurance companies will not pass on at least some of the losses they suffer. The ARA collapse has drawn attention to a serious flaw in the legislation covering general insurance intermediaries. The Act requires them to lodge premium payments made by clients - into a special bank account (section 48 account). However there is no mention in the Act of how payments out of this account should be handled.
In ARA's case the company owed £1.3 million to insurers but its Section 48 account contained only £59,000. Is there any point in having a separate account for clients' payments if there is no restriction on taking money out of the account? The Department of Enterprise and Employment needs to act to close this loophole. It also needs to examine other issues such as the adequacy of the bonding requirements and the potential legal risks for regulators who notify insurers about noncompliance by intermediaries.
In October at the IBA annual dinner, insurance intermediaries were challenged by the Minister of State for Commerce and Technology, Mr Pat Rabbitte, to say whether they were willing to do what needed to be done to restore confidence in the insurance and investment industry. Intermediaries must improve their compliance with the agreed code of conduct for the industry, but the Minister himself has work to do to help restore confidence in the industry.
