MGAs and Regulation

27 February 2015

The market currently operates two MGA models, an independent, stand alone MGA and a MGA that is a subsidiary of a broker.

From a regulatory resourcing stand point, independent MGAs tend to be relatively small and therefore have only modest regulatory resources or may seek to outsource this function. Many broker owned MGAs are large market players (e.g. Dual / Hyperion, Pen / AJ Gallagher) with a regulatory function commensurate with their size.

MGAs are an important part of the market, with one third of Lloyd’s business coming from coverholders, and a recent report by Deloitte found that 23% of brokers surveyed intend to grow by setting up an MGA, demonstrating that they are here to stay.

At the same time as the market is growing, the FCA is placing greater focus on delegated underwriting authorities, particularly in terms of Lloyd’s coverholders. Whilst Lloyd’s itself is also concerned to fully understand the MGA model and their perceived increased risk of conflicts of interest and consumer detriment.

For MGAs to effectively deal with these two issues to the satisfaction of regulators they need good, effective governance.

The conflict of interest issue applies to all MGAs, but is particularly relevant to those owned by brokers. However, on the basis that all the MGAs are authorised by the FCA and their executive are FCA Approved Persons, everybody concerned should know what is required by the regulator to avoid failing to meet the requirements. The same can be said of dealing with the problem of consumer detriment.

The real test of governance is therefore not just getting to grips with the theory of regulation but understanding how it works in practice within each individual business.

Any well run MGA should have nothing to fear from the regulator but the FCA does have at its disposal, the ability to call for a Section 166 investigation and MGAs should not underestimate the serious and costly nature of this type of investigation.

Capita’s MGA investment strategy recognises the pressure MGAs are under to fully meet regulatory requirements. To meet the challenge, when Capita invests in both start up and established MGAs as a minority shareholder it also provides comprehensive outsourcing solutions, which include regulation and compliance services.

The certainty of expert advice and resourcing for regulatory and compliance issues can allay any reservations that existing or start up MGAs may have over the scale and complexity of what is required to satisfy the regulator, allowing them to get on with building a successful business.

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