Gibraltar's FSC must restore faith after De Vert collapse

Gibraltar’s Financial Services Commission (FSC) is facing further pressure after the failure of a third insurer on its watch in almost as many months.

On 18 December Gibraltar-based De Vert Insurance petitioned Gibraltar’s Supreme Court to wind up the company and appoint a liquidator.

The news of De Vert’s demise reflects badly on the FSC because it closely follows the collapse of fellow Gibraltarian insurers Hill Insurance Company Limited, which petitioned for winding up on 28 August, and Lemma Europe Insurance Company, which filed for winding up on 19 September.

Also, De Vert’s fate closely resembles Hill’s. Both insurers alleged they were defrauded by their investment manager after discovering they were not the legal owners of the government bonds acting as their capital bases.

Regulatory regime in question

In fairness to the FSC, it acted quickly in both cases when it realised there was a problem. Also, because of the short time between the two failures, it likely did not have the opportunity to implement any lessons learned from Hill.

To the outside world, however, the collapses paint a less-than-flattering picture of the soundness of Gibraltar’s regulatory regime.

Gibraltar may well impose EU solvency standards on the insurers it licences, but this will not protect against the type of securities fraud that Hill and De Vert are claiming.

Observers will ask not only why the companies themselves did not discover the problems with their bond holdings sooner, but also why the FSC had not noticed.

Gibraltar is home to some financially strong and well-regarded insurance companies that need not suffer as a result of what has happened. But brokers would be justified in being wary of any small, new or unrated companies based on the island until the dust settles.

Contingent commissions also in the spotlight

Elsewhere, the industry could be facing pressure over another recurring issue in the shape of contingent commissions. Outgoing Willis chief executive rekindled the debate on the controversial payments that insurers use to reward brokers for showing them a certain volume or profitability of business, at the beginning of this week.

It will be interesting to see if the FSA’s efforts to stamp out mis-selling eventually stray into contingent commission territory.

The FSA is focusing on internal incentive schemes paid to sales staff and how they drive mis-selling. But it is not impossible to imagine the FSA’s work on internal incentives branching out into any external influences on these incentives.