PPPs and Insurance Mediation Activities

PROJECTS

PPPs and Insurance Mediation Activities

Ciara Seymour discusses the headache caused by the Insurance Mediation Directive.

PPPs and Insurance Mediation Activities

The Insurance Mediation Directive was fully implemented in the UK on 14th January 2005 and there has been much recent speculation as to the impact which it will have on the PPP sector.

Regulated Activities

Under the new regulations, the Financial Services Authority (the "FSA") has been given responsibility for the regulation of various activities relating to insurance products carried on by intermediaries. In particular, insurance
mediation activities which are carried on by way of business (and which are not exempt) will be regulated activities.

Application to the PPP Industry

In most PPP projects, the project company will put in place, maintain and administer insurance policies under which the awarding authority, the lenders and possibly sub-contractors will have rights. Such activities are believed to be caught by the widely worded definition of "insurance mediation activity" under the new regulations and will therefore be regulated activities if carried on "by way of business".

Typically, the unitary charge payable by the awarding authority includes an element of remuneration for the insurances which the project company takes out (even if it is only a reimbursement of the actual cost). It is arguable therefore that the project company does undertake insurance mediation by way of business.

In practice

So what effect have the new regulations had in the PPP market? There are two main concerns, namely:

• sponsors and directors of project companies are concerned about the criminal sanctions which apply for engaging in mediation services without authorisation. Potentially, the project company could be committing a criminal offence punishable by imprisonment of up to 2 years and/or a fine; and
• sponsors and funders alike are concerned that the project company may be unable to enforce any contracts of insurance which it arranges in breach of the new regulations.

There have been predictions that the possibility of a project company's insurance activities falling foul of the new regulations will lead to catastrophic results, such as delays in closing projects, breaches arising under the project and financing documents, reluctance by insurance companies to provide cover to unauthorised project companies and uncertainty over financial stability of existing projects.

FSA Guidance

In a letter to the PPP Forum, the FSA has indicated that in a typical PPP project arrangement, any project company which takes on contractual obligations relating to the arranging of insurance on behalf of other project parties will not be regarded as providing insurance mediation services to third parties for remuneration.

Although the FSA guidance is clearly welcome, it only covers projects which comply with its definition of a typical PPP project. Where any particular project differs materially from those usual arrangements, the FSA recommends that professional legal advice or individual guidance from the FSA be sought. In addition, as it is only guidance, there is no guarantee that a court won't take a different view in interpreting the new regulations.

Minimising the Risks

Possible courses of action to reduce the risks include:

• obtaining consent from the FSA - however this involves onerous and costly on-going regulatory requirements;
• relying on the exemption which permits a person to contract with an authorised person to carry out the mediation activities on its behalf - as the appointed representative must take full responsibility for all the mediation activities carried out by the project company, a 'trusting' representative must be found; or
• restructuring the transaction so that all insured parties each individually appoint the broker or to ensure there is full pass through of insurance costs to the awarding authority.

Going Forward

Whilst the FSA clarification is welcome, it remains to be seen whether it provides sufficient comfort to lenders and sponsors. Discussions have taken place with Treasury officials on the feasibility of enacting an exemption order to provide a blanket exemption from the obligation to seek authorisations for PPP projects. In the meantime, only time will tell what position the market will take.

Ciara is an Associate in the firm's Corporate Department specialising in projects and project financing. She is currently advising on a number of projects sponsored by the SIB, including the Belfast Schools Strategic Partnering PPP Project.

Ciara can be contacted at ciara.seymour@lestrangeandbrett.com

Quote: catastrophic results