FSA Files Raps Vs Mitsui Sumitomo Insurance, Ex-Chair
The Financial Services Authority (FSA) has fined Mitsui Sumitomo Insurance Company (Europe) Ltd (MSIEu) £3,345,000 for serious corporate governance failings, and imposed a ban and fine of £119,303 on its former executive chairman, Yohichi Kumagai.
MSIEu is a London-based subsidiary of the Japanese insurance firm Mitsui Sumitomo Insurance Company Ltd (Japan), which is part of one of the world’s largest non-life insurance groups. MSIEu historically supplied wholesale insurance cover only to Japanese firms operating in Europe and the Middle East. From 2007 it expanded into non-Japanese business and by the end of 2010 half its premiums were coming from this source, much of it from branches in France and Germany.
The main failings included:
Kumagai and MSIEu failed to take prompt and effective action to ensure that appropriate governance and control arrangements were put in place. This resulted in MSIEu being poorly organised and managed across its business as a whole and board effectiveness being weak.
Kumagai and MSIEu failed to ensure that key posts at MSIEu were filled with staff who had the necessary experience, knowledge and time to fulfil their roles effectively. For example, Kumagai failed to hire a chief underwriting officer, a factor which then hindered the firm’s ability to control the expansion of the business.
Kumagai and MSIEu did not ensure the effective and timely implementation of a new IT administration system which led to shortcomings in management information available to the board.
MSIEu had significant weaknesses in its branch oversight, reserving and aggregate management processes.
In April 2009 Kumagai was seconded from the Japanese parent company and appointed as executive chairman of MSIEu. His appointment was part of a staff rotation programme through which a number of directors were regularly sent to MSIEu. Typically they had only limited experience of non-Japanese insurance business and UK regulatory obligations.
Shortly after his appointment the FSA wrote to Kumagai and MSIEu stating that expansion into European markets would need careful and focussed oversight from an appropriately skilled and experienced board. The firm’s systems and controls would also have to be improved to identify and address the risks inherent in this new area.
As executive chairman, Kumagai was the key decision maker at MSIEu and responsible for ensuring that the business was run competently and in a controlled manner. Despite receiving clear guidance from the FSA that the management structure and composition of the board was ineffective, he failed to take prompt action to remedy the situation.
Kumagai failed to ensure that key posts at MSIEu were filled with staff who had the necessary experience, knowledge and time to fulfil their roles effectively. For example, he failed to hire a chief underwriting officer, a factor which then hindered the firm’s ability to control the expansion of the business. In addition, Kumagai did not ensure the effective and timely implementation of a new IT administration system across the firm’s branch offices which led to shortcomings in the management information available to the board. These were significant failings of corporate governance and control arrangements.
Overall MSIEu had significant failings in corporate governance and control arrangements which resulted in it being poorly organised and managed across its business as a whole.
Tracey McDermott, acting FSA director of enforcement and financial crime, said: “Senior management must take responsibility for the firms that they run. Kumagai failed to respond adequately to the changing risks facing his business even after they had been pointed out by the FSA. If those who hold senior positions in financial services firms had had any doubt about how seriously we view their regulatory responsibilities this fine and ban should make our position crystal clear.
“The failures by Kumagai and the firm have result in significant sanctions for both him and MiSEU. The FSA requires firms to have effective corporate governance and controls. They must adapt these appropriately to reflect changes in their risk profile, especially growth into new areas.”
MSIEu breached Principle Three of the FSA’s Principles for Businesses by failing to take reasonable care to organise and control its affairs responsibly and effectively. Kumagai breached Statements of Principle Five and Seven by failing to take reasonable steps to make sure that the business of the firm for which he was responsible as a significant influence holder was organised so that it could be controlled effectively and comply with the relevant regulatory standards.