This tough punishment is a warning to the industry on regulatory responsibilities, says Michael Faulkner
' Goshawk's £220,000 fine from the FSA has hardly come at a good time for the embattled insurer.
After weeks of fending off accusations of mismanagement by its largest shareholder, Phoenix Asset Management, it has also been stung by gross losses of $130m from Hurricane Katrina.
Not the best of years for the company.
And now Goshawk's quest to raise new capital and sell off its Bermuda reinsurance arm Rosemont Re, a vehicle that has been the company's focus under the current management team, came to an end this week.
It is likely that, barring some sort of miracle, Rosemont Re will be put into run-off.
Goshawk will not be rising phoenix-like from the ashes this time it would seem.
In addition to being a further kick in the teeth to Goshawk, the FSA's fine and the timing of its publication raise some broader questions for brokers and insurers.
The fine was levied for breaches of FSA rules in 2002 and 2003 by Goshawk's subsidiary, Goshawk Syndicate Management. The regulator found that Goshawk's systems and controls had failed, especially its management of binding authority agreements.
Goshawk had signed a number of binders without properly vetting the third parties or monitoring their operation. This, said the FSA, exposed the syndicate managed by Goshawk to "unnecessary risk" and contributed to "significant losses" on these binding authorities.
In addition, the FSA found there was a "breakdown in the system of independent review of underwriters' activities at Goshawk giving rise to an inadequate review of risk".
This fine, which could well have been much larger had Goshawk's capital position been stronger, is a warning to the industry.
The FSA's message is simple: companies must have robust systems and controls in place to monitor those for whom they have regulatory responsibility. Failure to do so will lead to tough penalties.
This is a significant issue for the insurance industry. Most insurers, at least in the composite market, now offer brokers risk transfer, meaning they are responsible for ensuring the financial stability of their agents.
Many brokers too now have networks of introducers and appointed representatives whom they must also monitor. Some brokers are said to have as many as 150 appointed representatives on their books, posing an enormous challenge when it comes to monitoring and review.
As Margaret Cole, the FSA's new director of enforcement said on announcing the Goshawk fine: "The FSA considers that robust systems and controls are fundamental in helping to maintain efficient, orderly and fair markets and it will take firm action where firms fail to ensure they are in place." IT
