FINAL NOTICE

Address:
Global Ridgeway Holdings Ltd
Unit B02 am

Basepoint Business & Innovation Centre

ACTION

1.
For the reasons given in this notice, the Authority hereby:

a)
imposes on Shay Reches a financial penalty pursuant to section 63A(1) of
the Act of £1,050,000 plus any of the sum of £13,130,000 which Mr Reches
is proposing to pay to various insurers that remains unpaid (“the Additional
Penalty”); and

b)
makes an order prohibiting Mr Reches from performing any function in
relation to any regulated activities carried on by any authorised or exempt
persons, or exempt professional firm. This order takes effect from 1
February 2016.

2.
The Authority therefore imposes a combined penalty of £1,050,000 plus the
Additional Penalty.

3.
Mr Reches agreed to settle at an early stage of the Authority’s investigation. Mr
Reches therefore qualified for a 30% (stage 1) discount under the Authority’s
executive settlement procedures. Were it not for this discount, the Authority
would have imposed a financial penalty of £1,500,000 (plus the Additional
Penalty) on Mr Reches.

SUMMARY OF REASONS

4.
Mr Reches has never been an approved person. Between 1 December 2010 and
23 September 2013 (“the Relevant Period”) he was an active entrepreneur in the

UK and European insurance market. During the Relevant Period, he had links to a
number of entities providing insurance cover in the UK, including reinsurers,
insurers, managing agents, coverholders, and brokers. Some of these entities
were central to insurance schemes in the solicitors’ professional indemnity
insurance (“Solicitors’ PII”) market where the cover failed in three consecutive
years (2011/2012, 2012/2013 and 2013/2014).

5.
These failings in cover contributed to two European insurers, namely European
Risk Insurance Company (“ERIC”) and Balva Insurance Company AAS (“Balva”)
being placed into administration and subsequently being declared in default by
the Financial Services Compensation Scheme (“the FSCS”). The FSCS has been
left with substantial claims and by July 2015 had paid claims totalling £9.1m.

6.
Entities controlled by and connected to Mr Reches, including UK insurance firm
Millburn Insurance Company Limited (in administration) (“Millburn”), were also
involved in insurance schemes other than Solicitors’ PII where the cover similarly
failed leaving the FSCS with significant liabilities.

7.
Mr Reches was central to the establishment and operation of the failed insurance
schemes and the Authority considers that he demonstrated a lack of integrity in
that he was reckless in disregarding the risk that directing payments of insurance
premiums to parties other than the insurers and reinsurers responsible for paying
claims could result in insurers and reinsurers being unable to pay claims.

8.
In the period 2011/2012, Mr Reches was involved in arranging a scheme whereby
solicitors obtained Solicitors’ PII from ERIC. This cover was reinsured by Balva
and by Sinclair Insurance Company Limited (“Sinclair”), a reinsurance company
owned and controlled by Mr Reches. Mr Reches directed payments of the
majority of the premiums, paid by solicitors through UK authorised brokers and
managing general agent Aderia UK Limited (“Aderia”), to a variety of third
parties. Little money from premiums was paid to the insurers ERIC or Balva. As a
result, neither had sufficient funds to meet claims and relied upon Sinclair to
honour the reinsurance arrangements. Sinclair failed to cover all the reinsurance
claims or pay out on its guarantee agreements.

9.
In the period 2012/2013, Mr Reches was involved in setting up a similar scheme
for Solicitors’ PII, but this time with Balva providing the cover, which was
reinsured by Sinclair. Again, Mr Reches directed a substantial amount of the
solicitors’ insurance premiums to a variety of third parties. As a result, Balva did
not have sufficient funds to meet claims and again relied upon Sinclair to honour
the reinsurance arrangements. Sinclair again failed to cover the reinsurance
claims or pay out on its guarantee agreements.

10.
Balva’s licence to provide insurance was suspended by its home state regulator,
the Financial and Capital Market Commission, the Latvian regulatory authority, in
April 2013. Mr Reches then negotiated with a third European insurer, Berliner
Versicherung Aktiengesellschaft (“Berliner”), to provide the Solicitors’ PII cover
originally underwritten by Balva. Mr Reches introduced Berliner to a number of
brokers and Aderia signed a binding authority agreement with Bar Professions
Limited (“Bar”) which then offered the replacement cover for the 2012/2013 year,
as well as renewal cover for the 2013/2014 year, to solicitors before Berliner had
agreed to provide Solicitors’ PII to the UK market. More than 900 solicitors
accepted the replacement cover.

11.
Berliner subsequently signed an agreement to provide replacement cover several
weeks later, however only up to a limit of €5m. This was barely sufficient to fund
the replacement cover, let alone any renewals or new business in the approaching

policy year. Berliner’s agreement was later annulled and more than 900 solicitors’
firms were exposed to the risk that they may have been left without mandatory
Solicitors’ PII cover.

12.
Mr Reches, as part of his setting up and running of the insurance schemes,
performed the CF1 (Director (AR)) controlled function at an authorised firm
(Coverall Worldwide Limited) with responsibility for its appointed representative,
Aderia, without approval. Mr Reches was given authority by Aderia to sign
documents on behalf of Aderia, however the Authority is of the view that Mr
Reches knew, or could reasonably be expected to have known, that in the
circumstances he was performing a controlled function without the necessary
approval of the Authority for the purposes of section 63A(1) of the Act.

13.
As a result of Mr Reches’ recklessness as well as his carrying out of a controlled
function without the necessary approval, the Authority is of the view that he is
not a fit and proper person to perform any function in relation to a regulated
activity carried on by an authorised or exempt person, in that his conduct
demonstrates a lack of integrity. The Authority also considers it relevant to
consideration of his fitness and propriety that Mr Reches is subject to six cease
and desist orders issued in 2006 (either in his own name, or that of his
companies) in Canada and the USA for selling insurance without a licence and
that he has failed to deal with the Authority in an open and cooperative way in
relation to disclosing to the Authority information regarding Sinclair’s financial
position and ability to pay claims.

14.
The Authority considers Mr Reches’ misconduct to be serious because:

a)
customers have been exposed to the significant risk that insurers with
whom their policies were held would not be able to pay legitimate claims,
which could have caused financial loss to those customers;

b)
his actions contributed to Millburn, ERIC and Balva being placed into
administration; and

c)
the failures resulted in the FSCS having to make substantial payments of
claims totalling £9.1m with the forecast final liabilities being £28.8m.

15.
Section 63(A)(1) of the Act gives the Authority the power to impose a penalty on
an unapproved person. Prohibiting and fining Mr Reches will send a clear
deterrent message to unapproved individuals operating in the insurance market
and supports the Authority’s regulatory objectives of securing an appropriate
degree of protection for consumers, and protecting and enhancing the integrity of
the UK financial system.

16.
Mr Reches has indicated to the Authority that he intends to pay £13.13m to the
three insurers, namely ERIC, Balva and Millburn. This payment will deprive Mr
Reches of the indirect benefit that the Authority considers he has gained from his
misconduct in directing payments out of Solicitors’ PII premiums. These monies
will make a substantial contribution towards the liabilities of these three insurers,
including liabilities to the FSCS and UK policyholders. All three insurers have been
declared in default by the FSCS. Other UK policyholders are creditors in the
liquidations or administrations of these insurers and will therefore benefit from
this payment.

DEFINITIONS

17.
The definitions below are used in this Final Notice.

“the Act” means the Financial Services and Markets Act 2000.

“the Additional Penalty” means any of the sum of £13.13m which Mr Reches has
not paid to Balva, ERIC and Milburn at the end of the agreed payment term.

“Aderia” means Aderia UK Limited, now known as II&B UK Limited and previously
known as JCM Insurance Brokers Limited and JCM Brokers Ltd.

“AR” means appointed representative.

“the Authority” means the body corporate previously known as the Financial
Services Authority and renamed on 1 April 2013 as the Financial Conduct
Authority.

“BAA” means a binding authority agreement, an agreement whereby an insurer
(or its MGA) delegates underwriting authority to another party known as the
Coverholder (often an insurance broker) which will act on behalf of the insurer to
the extent permitted by the agreement, which frames the responsibilities,
entitlements and obligations of the parties.

“Balva” means Balva Insurance Company AAS, a Latvian insurer and a Passported
Firm.

“Balva MGA Agreement” means the MGA Agreement, which was signed between
Balva and Aderia on 18 August 2011.

“Bar” means Bar Professions Limited (in liquidation) (and its AR, Apro
Management Limited), UK-based Coverholders.

“Berliner” means Berliner Versicherung Aktiengesellschaft, a German insurer and
Passported Firm.

“Berliner MGA Agreement” means the MGA Agreement, which was signed
between Berliner and Aderia on 15 July 2013, and took effect retrospectively from
1 June 2013.

“Coverall” means Coverall Worldwide Limited, a UK insurance intermediary.

“Coverholder” means a company (often an insurance broker) authorised to enter
into contracts of insurance, on behalf of an insurer, in accordance with the terms
of a BAA.

“the director controlled function” means the Authority’s controlled function of CF1
(Director (AR)) at Coverall with responsibility for its AR, Aderia.

“DEPP” means the Authority’s Decision Procedure and Penalties Manual.

“EG” means the Authority’s Enforcement Guide.


“ERIC” means European Risk Insurance Company, an Icelandic insurer and
Passported Firm.

“the FCMC” means the Financial and Capital Market Commission, the Latvian
regulatory authority, also known as Finanšu un Kapitāla Tirgus Komisija (the
FKTK).

“FIT” means the Authority’s Fit and Proper test for Approved Persons.

“FSCS” means the Financial Services Compensation Scheme.

“MGA” means a managing general agent, an insurance intermediary which has
contractual authority from one or more insurers to provide underwriting services
on their behalf.

“MGA Agreement” means a contractual agreement giving an MGA contractual
authority from one or more insurers to provide underwriting services, including
negotiating and entering into binding authorities with Coverholders for the sale
and fulfilment of policies, on behalf of the insurers.

“Millburn” means Millburn Insurance Company Limited (in administration), a UK
insurer.

“Mr Bygrave” means Robert John Bygrave.

“Mr Reches” means Shay Jacob Reches.

“Mrs Sadler” means Andrea Christine Sadler.

“Passported Firm” means a European Economic Area firm exercising its right to
conduct activities and services regulated under EU legislation in the UK on the
basis of its authorisation in its European Economic Area home state.

“Principal” means an authorised firm which permits its AR(s) to carry on regulated
activities under its Part 4A permission given by the Authority under Part 4A of the
Act to carry on certain regulated activities.

“Relevant Period” means the period from 1 December 2010 to 23 September
2013.

“Sinclair” means Sinclair Insurance Company Limited, a Union of Comoros insurer
now known as Klapton Insurance Company Limited.

“Solicitors’ PII” means professional indemnity insurance provided to solicitors.

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).

FACTS AND MATTERS

18.
Mr Reches is a non-EU citizen, an unapproved person and an active entrepreneur
in the UK and European insurance market. He owned a UK holding company and
through its subsidiary companies and other international companies that he
controlled, Mr Reches exercised significant influence and control over a number of

entities including insurers, reinsurers, managing agents and brokers either
authorised or operating in the UK market.

19.
Between October 2010 and September 2013 Mr Reches invested in a number of
insurance companies via a group of companies under his control. Through these
companies Mr Reches owned more than 95% of Balva, 9.91% of Millburn, and
more than 89% of Sinclair.

20.
During the Relevant Period companies under the control of Mr Reches owned 95%
of Aderia. Aderia was appointed as the AR of Coverall and Millburn in 2010.

21.
As a result of the significant influence and control that Mr Reches exerted over
these entities, he was responsible for effecting a number of contractual
arrangements in the UK insurance market that resulted in insurance premiums
paid by customers being transferred away from the insurers which had
responsibility to meet and pay any claims due under the policies issued to the
customers.

Disciplinary history

22.
In 2005, Mr Reches formed Sinclair in the Union of Comoros and around that time
Sinclair began selling insurance policies online.

23.
In around 2006, a number of US states and one Canadian province were
concerned that Sinclair was entering into insurance transactions through its
offshore representative without the required licences in the respective
states/province. Investigations were undertaken by six US states as well as the
province of British Columbia, Canada, to establish whether the company and/or
associated companies and individuals were operating in the insurance market
without the appropriate licences.

24.
The investigations resulted in Sinclair, an offshore representative (or employees
of these companies) and Mr Reches being issued with cease and desist orders
from the US states of Idaho, Florida, Nebraska, Arkansas, Washington and the
Canadian province of British Columbia. These orders prevented those named from
undertaking unlicensed insurance activity within the states/province in question.

25.
On 12 September 2011, the Authority published a warning on its website stating
that the Authority believed that Sinclair had been providing financial services or
products in the UK without authorisation.

Mr Reches’ role at Aderia

26.
Mr Reches owned Aderia through a group of companies under his control. He did
not hold any of the Authority’s controlled functions at Coverall or Millburn, the
Principals with responsibility for Aderia, but nonetheless controlled and
significantly influenced aspects of its business. Mr Reches signed a number of
documents on behalf of Aderia pursuant to the delegated authority he had
received from the Directors of Millburn and Aderia.

27.
Mr Reches undertook a number of tasks in relation to the negotiation and
execution of insurance agreements on behalf of Aderia. Specifically he:

a)
signed the ‘Loss Adjusting Agreement’ dated 16 May 2011 between Millburn
and a claims management firm;

b)
signed the ‘Provision of Insurance Services’ (the “Balva MGA Agreement”)
dated 18 August 2011 between Balva and Aderia and a later amendment to
this agreement;

c)
signed the ‘Contract Guarantee Cover’ dated 6 September 2011 between
Millburn, Balva and ERIC;

d)
signed the ‘Solicitors' Professional Indemnity Insurance Handling Parameters
Agreement’ dated 14 September 2011 between Balva and a claims handling
firm;

e)
signed a ‘Fronting Agreement’ dated 27 September 2011 between ERIC and
Balva to facilitate provision of insurance cover for the UK market;

f)
signed an agreement dated 6 March 2012 between Aderia and Bar;

g)
played the key role in negotiating the Berliner MGA Agreement between
Aderia and Berliner and signed the agreement dated 15 July 2013 on behalf
of Aderia; and

h)
signed at least 13 other insurance agreements in relation to insurance
mediation at Aderia.

28.
Mr Reches had influence and control over the board of Aderia. Mr Reches had
particular influence over Mrs Sadler, who was approved to perform the CF1
(Director (AR)) controlled function with responsibility for the day-to-day operation
of the insurance business and Mr Bygrave, who was approved to perform the CF1
(Director (AR)) controlled function with responsibility for the disbursement of
premium monies. In particular, Mr Reches:

a)
instructed Mrs Sadler to sign BAAs between Berliner and Bar and date them
from 1 May 2013 before the terms of the underlying MGA Agreement had
been concluded;

b)
provided Mrs Sadler with a script before a meeting with the Authority on 17
July 2013;

c)
overruled Mrs Sadler when renegotiating the terms of an agreement with a
UK broker;

d)
attended crucial meetings with Berliner and Bar on behalf of Aderia without
Mrs Sadler and Mr Bygrave;

e)
directed Mr Bygrave, who was responsible for the disbursement of
premiums, to make payments from Aderia using Solicitors’ PII funds to
purchase Balva; and

f)
instructed Mr Bygrave to make a payment of £2.65m on behalf of Aderia, to
a European broker as a fee for a proposed reinsurance required by Balva.
The reinsurance arrangements were never completed and no money was
repaid to Aderia or any other party with responsibility to meet and pay any
claims due under the policies issued to customers.

29.
Mr Reches controlled the professional relationship with Bar. Specifically, Mr
Reches:

a)
controlled the negotiation of the BAA directly with Bar and did not include
Mrs Sadler;

b)
did not make Mrs Sadler aware of the discrepancy in underwriting limits
contained in Aderia’s BAA with Bar (£50m) and the Berliner MGA Agreement
with Berliner (€5m);

c)
was responsible for negotiating the Terms of Business Agreements with Bar;
and

d)
sourced, negotiated and executed the Solicitors’ PII agreement for the
policy years 2012/2013 and 2013/2014 involving Balva, Berliner and Bar.
Mr Reches signed the MGA Agreement which appointed Aderia as Berliner’s
MGA, effective from 1 June 2013.

Solicitors’ professional indemnity insurance

30.
Mr Reches was the controlling influence in three materially similar insurance
based schemes for Solicitors’ PII that have failed. Specifically:

a)
Solicitors’ PII for the 2011/2012 policy year through ERIC;

b)
Solicitors’ PII for the 2012/2013 policy year through Balva; and

c)
Solicitors’ PII for the 2012/2013 and 2013/2014 policy years through
Berliner.

31.
Whilst performing the director controlled function without approval, the Authority
considers that Mr Reches acted recklessly in that he directed the insurance
premiums in relation to these Solicitors’ PII schemes be transferred away from
ERIC, Balva and Sinclair which had the responsibility to meet and pay any claims
due under the policies issued to customers. In relation to Solicitors’ PII
premiums, an amount of in excess of £18.8m net of Coverholders’ and brokers’
commission was paid out at the direction of Mr Reches, or to companies in which
he had an interest or exercised control over. This included amounts paid for
claims arising on other insurance schemes which were insured by Millburn and/or
reinsured by Sinclair. Less than £2m was paid to insurers as premiums. £13.13m
of the funds were used by Mr Reches and his companies to purchase insurance
companies, including Balva and Millburn. Mr Reches was central to the
establishment and operation of the failed insurance schemes. The Authority
considers that Mr Reches was aware that these actions would result in a risk that
claims made under the policies would either not be paid, or result in a liability for
the FSCS. The Authority is of the view that Mr Reches indirectly benefited from
these payments.

32.
While influencing and controlling the contractual arrangements, Mr Reches has
performed a controlled function at Coverall via its AR, Aderia, without being
approved by the Authority and has exercised significant influence over Millburn
via its AR, Aderia.

Policy year 2011 / 2012

33.
In September 2011 Mr Reches was involved in arranging for ERIC to provide
fronting insurance cover in the UK for Solicitors’ PII policy year 2011/2012. Mr
Reches then arranged for this cover to be reinsured by both Balva, which he had
agreed to purchase via companies under his control, and Sinclair. A separate
agreement, signed by Mr Reches for Aderia in September 2011, stated that

Balva’s liabilities to ERIC were guaranteed by Millburn, however this guarantee
was never called on.

34.
On 20 September 2011 Mr Reches signed a Solicitors’ PII claims handling
parameters agreement on behalf of Aderia between Balva and a claims
management firm.

35.
Balva, via its MGA Aderia, signed an agreement with Bar, which arranged for
Solicitors’ PII policies to be sold to UK solicitors and ultimately took receipt of the
premium paid.

36.
An amount of in excess of £7.1m net of Coverholders’ and brokers’ commission
was paid to companies under the control of Mr Reches in relation to Solicitors’ PII
premiums. Less than £1.2m was paid to ERIC (and none to Balva) as premiums.
The majority of the funds were used by Mr Reches and his companies to purchase
insurance companies, including Balva and Millburn.

37.
Under instruction from Mr Reches, purporting to be acting on behalf of Aderia, the
broker arranged for the disbursement of these funds. As a result of these
arrangements insufficient funds were paid to insurers and they were unable to
meet all claims as they fell due.

38.
Both Millburn and Balva disputed their liability under the agreements signed by Mr
Reches. Millburn also stated that documents were signed without its authority or
knowledge. In addition, Sinclair has failed to pay out for a substantial number of
claims made under Solicitors’ PII policies sold.

39.
ERIC was subsequently placed into administration. The FSCS declared it in
default on 28 April 2013 and as a result, the FSCS has estimated liabilities of £9m
as a result of the failure of ERIC to meet claims.

Policy year 2012 / 2013

40.
Balva was granted permission to provide insurance in the UK on 28 November
2011. In August 2011 Mr Reches, via companies under his control, agreed to
purchase more than a 95% shareholding in Balva. Payment for the shares was
made in tranches between November 2011 and October 2012. The money for the
share purchases came from premiums paid by customers for Solicitors’ PII
policies.

41.
Mr Reches signed an agreement with Bar on behalf of Aderia in March 2012. This
agreement permitted Bar to offer Solicitors’ PII underwritten by Balva to the UK
market.

42.
Mr Reches signed an agreement in July 2012 which purported to commit Millburn
to reinsure some of Balva’s liabilities. In the same month Mr Reches arranged for
Sinclair to act as guarantor to Millburn for all of its liabilities to Balva for 2012.

43.
In September 2012 Mr Reches signed a Qualifying Insurer’s Agreement with the
Law Society of England and Wales on behalf of Balva. The agreement permitted
Balva to provide Solicitors’ PII to customers in England and Wales.

44.
Millburn disputed its liability to Balva under the reinsurance agreement and Mr
Reches therefore made arrangements for other insurers to replace Millburn. The
replacement arrangements were such that Sinclair continued to carry the liability
for the scheme by acting as guarantor.

45.
An amount of £13.3m net of Coverholders’ and brokers’ commission was paid to
Aderia in relation to Solicitors’ PII premiums, but less than £0.3m was paid to
Balva as premium. The majority of the funds were used by Mr Reches and his
companies to purchase insurance companies (including Balva and Millburn) or to
increase their capital, paying claims arising on other insurance schemes insured
by Millburn and/or reinsured by Sinclair and lending sums to Balva.

46.
Under instruction from Mr Reches, Mr Bygrave disbursed the funds received from
Solicitors’ PII premium.

47.
Despite requests from Balva, Sinclair failed to provide sufficient funds to cover its
liability as reinsurer. This resulted in the FSCS declaring Balva in default on 4 July
2014. The result of this is that the FSCS has estimated liabilities of £13.8m
because of the failure of the insurers to meet claims.

48.
In order to comply with the regulatory requirements of the FCMC, Mr Reches
arranged for a third party insurer to reinsure Balva’s liabilities relating to
Solicitors’ PII. Mr Reches arranged for a payment of £2.65m to be made to the
third party insurer as a fee. This reinsurance agreement lapsed without any
repayment of fees leaving Sinclair as Balva’s reinsurer despite this arrangement
not meeting the express regulatory requirements of the FCMC.

49.
Balva’s licence to underwrite UK insurance business was suspended by the FCMC
in April 2013, and was completely withdrawn in June 2013. Balva subsequently
entered into liquidation. Aderia therefore needed to find replacement cover for the
remainder of that policy year and prior to the renewal period for the 2013/2014
year.

Policy year 2013 / 2014 (including part of 2012/2013 with Berliner)

50.
In or around April 2013, Mr Reches began negotiating with Berliner on behalf of
Aderia in order to secure the Berliner MGA Agreement.

51.
Prior to the Berliner MGA Agreement being executed, Aderia entered into BAAs
with Coverholders authorising them to transact insurance business on behalf of
Berliner. This included entering into a BAA with Bar, which was signed on 17 May
2013. The underwriting limits in these agreements were beyond the €5m limit
subsequently granted by the Berliner MGA Agreement.

52.
On 23 May 2013 Mr Reches signed a qualifying insurer’s agreement with the Law
Society of England and Wales on behalf of Berliner. The agreement allowed
Berliner to provide Solicitors’ PII to customers in England and Wales.

53.
With this qualifying insurer’s agreement in place, and as Aderia had signed the
BAA with Bar which purported to give Bar authority to write Solicitors’ PII on
behalf of Berliner, Bar decided in late May/early June 2013, to send an offer letter
to its customers. This offer letter advised that Balva had been suspended and
offered customers alternative arrangements with Berliner for the remainder of the
2012/2013 year as well as for the 2013/2014 year. At the time these offer letters
were sent, no underlying MGA Agreement had been signed between Aderia and
Berliner and there was therefore a risk that no replacement insurance would be
available for customers who held policies written by Balva.

54.
The Berliner MGA Agreement was ultimately only signed on 15 July 2013 by
Berliner and Mr Reches on behalf of Aderia some six weeks after the offer letter
was sent by Bar. The Berliner MGA Agreement (which retrospectively authorised
Aderia to issue BAAs to Coverholders from 1 June 2013) set an annual premium

income limit for Solicitors’ PII policies of €5m, representing the maximum
exposure that Berliner was prepared to underwrite. This was inconsistent with the
annual premium income limit granted to Bar by Aderia of £50m (in respect of the
cover Berliner could offer for Solicitors’ PII). It also meant that the underwriting
limit of €5m was exhausted by the replacement cover for the Solicitors’ PII
policies insured by Balva for the 2012/2013 policy year. This meant that there
would have been no capacity available for the proposed renewal cover into the
2013/2014 policy year.

55.
After becoming aware of the anomalies regarding the underwriting limits granted
to Bar, Berliner met with Aderia and the Berliner MGA Agreement was annulled
with the mutual consent of Aderia and Berliner on 23 September 2013. As a
consequence, over 900 solicitors’ firms, which took up the offer of replacement
and renewal cover as set out in the offer letter, were faced with the prospect of
having no compulsory Solicitors’ PII in place for the 2012/2013 policy year and
were required to seek new cover from different providers for the 2013/2014
policy year or cease practising as solicitors.

Non-solicitors’ professional indemnity insurance transactions

56.
Mr Reches had influence over three schemes insured by Millburn that failed. Mr
Reches signed BAAs on behalf of Millburn via Aderia for the schemes. Specifically:

a)
an agreement, dated 13 January 2011, with a UK broker in respect of
policies in the classes of Damage to Property, Goods in Transit and
Miscellaneous Financial Loss;

b)
an agreement with a UK broker in respect of schools staff absence in the
UK, dated 9 March 2011; and

c)
an agreement with a European broker specialising in motorsport insurance
in respect of race, rally and motorbike on event/on track insurance.

57.
In all three schemes the responsibility to meet the cost of claims ultimately fell to
Sinclair as guarantor/reinsurer of Millburn. Sinclair failed to provide sufficient
funds to meet all claims made under the policies and as a result, Millburn entered
into administration.

58.
The FSCS declared Millburn in default on 11 December 2013 and as a result the
FSCS has estimated liabilities of £5.9m.

Mr Reches’ knowledge/awareness that he was undertaking controlled
functions which required him to be approved

59.
Mr Reches has over 40 years of experience in the insurance market including in
the UK. Mr Reches stated in interview with the Authority that he knew that active
involvement in insurance companies beyond simple investment could require
approval by the Authority.

60.
Mr Reches also had a close involvement in the recruitment of approved persons to
work at Aderia, such as Mrs Sadler. The details he provided to the Authority at
interview about the need for Aderia to have approved persons in charge
demonstrates an understanding of the need for approval to carry out certain
functions at both authorised firms and their ARs.

61.
Mr Reches has a clear understanding of the need for approval from regulators in
international jurisdictions as well as in the UK. Mr Reches had previous

engagement with the Authority in 2010 from which he would have been aware of
the relevant requirements of the UK regulatory system.

Reinsurance arrangements

62.
As set out above as a result of the reinsurance arrangements made by Mr Reches,
the liability for the Solicitors’ PII policies in 2011/2012, 2012/2013 and
2013/2014 and Millburn ultimately rested with Sinclair.

63.
Sinclair is owned by companies under the control of Mr Reches and he is the
Director and key decision maker. Mr Reches was best placed to understand the
financial status of Sinclair and signed the agreements referred to above with ERIC
and Balva that relied on Sinclair’s ability to offer effective guarantees/reinsurance.

64.
The failure of the reinsurance arrangements made by Mr Reches led to ERIC,
Balva and Millburn entering into administration due to debts owed by Sinclair. Mr
Reches informed the Authority that the failure to honour reinsurance obligations
was a result of funds being frozen in Cyprus. However, Mr Reches has provided
no evidence to substantiate his claim that the funds have been frozen, nor has he
demonstrated that Sinclair would have had sufficient funds to have met its
reinsurance liabilities (were it not for the accounts purportedly being frozen).

65.
In May 2013, despite funds in Cyprus apparently being frozen, Mr Reches
committed Sinclair to guarantee and reinsure the liabilities of Balva.

66.
After the Cypriot banking crisis began, Millburn sought assurances from Sinclair’s
overseas auditor that it was solvent and had adequate resources to continue to
meet its obligations in the foreseeable future. In July 2013, these assurances
were given, but Sinclair has not paid its reinsurance guarantees to ERIC, Balva or
Millburn.

Lack of co-operation with the Authority’s investigation

67.
Despite repeated requirements, Mr Reches has provided insufficient information in
relation to Sinclair’s financial situation, including where the relevant funds are
held and its ability to pay claims.

68.
In particular, Mr Reches has provided no evidence to substantiate the assertion
that Sinclair’s funds were frozen in Cyprus, being the primary reason provided by
Mr Reches for Sinclair’s inability to pay claims.

FAILINGS

69.
The regulatory provisions relevant to this Final Notice are referred to in Annex A.

70.
On the basis of the facts and matters described above, the Authority considers
that during the Relevant Period Mr Reches performed a controlled function
without approval knowing (or being of such knowledge and experience that he
could reasonably be expected to know) that he was performing a controlled
function without approval for the purposes of section 63A(1) of the Act.

71.
The relevant sections of FIT are set out in Annex A to this Notice. FIT 1.3.1G
states that the Authority will have regard to, among other things, a person’s
honesty and integrity and competence and capability when assessing the fitness
and propriety of a person to perform a particular controlled function. As a result
of the failings described above, the Authority considers that Mr Reches’ conduct

has fallen short of minimum regulatory standards and that he is not a fit and
proper person.

72.
In particular, the Authority considers that Mr Reches’ conduct demonstrates a lack
of integrity in that he was reckless in disregarding the risk that directing
payments of insurance premiums to parties other than the insurers and reinsurers
responsible for paying claims could result in insurers and reinsurers being unable
to pay claims.

Section 63A(1) of the Act

73.
Mr Reches performed the director controlled function without approval knowing
(or being of such knowledge and experience that he could reasonably be expected
to know) that he was performing a controlled function without approval. In
particular, Mr Reches:

a)
performed the director controlled function at Coverall with responsibility for
its AR, Aderia, without the requisite approval of the Authority, including the
execution of agreements on behalf of Aderia;

b)
influenced and directed the day to day operations of Aderia and, in
particular, the actions of Mrs Sadler and Mr Bygrave;

c)
instructed Mr Bygrave to transfer Solicitors’ PII premiums to third parties,
rather than directly to the relevant insurers;

d)
controlled the professional relationships of Aderia with Bar;

e)
executed numerous insurance agreements on behalf of Aderia during the
Relevant Period;

f)
sourced, negotiated and executed for Aderia the Solicitors’ PII agreements
for the policy years 2011/2012, 2012/2013 and 2013/2014 involving ERIC,
Balva and Berliner; and

g)
has significant experience in the insurance market and was aware of the
need for individuals to be approved by the Authority in the UK in order to
carry out certain tasks.

FIT 2

74.
Further, the Authority considers that Mr Reches was not a fit and proper person to
perform functions in relation to a regulated activity carried on by an authorised or
exempt person, in that he showed a lack of integrity, in breach of FIT 2.1. In
particular he:

a)
exercised control over Coverall and influence over Millburn (as an
unapproved person) in that he directed the regulated insurance business of
these firms without the requisite approval to perform the CF1 (Director
(AR)) controlled function;

b)
put in place guarantees and/or reinsurance arrangements backed by Sinclair
when he was aware of the clear risk that it was unlikely to meet claims;

c)
directed that insurance premiums from customers be transferred to parties
other than the insurers which had the responsibility for paying claims. He
was aware of the clear risk that such arrangements would lead to a failure
in cover but unreasonably took that risk. The subsequent failure of these
reinsurance and guarantee arrangements has contributed to ERIC, Balva
and Millburn being placed into administration, and left the FSCS with
estimated liabilities of £28.8m. These FSCS liabilities are funded by
authorised firms through the FSCS annual levy;

d)
arranged for the Solicitors’ PII cover with Balva to move to Berliner during
the 2012/2013 and 2013/2014 policy years when he knew or could
reasonably be expected to have known that the amount of cover offered by
Berliner was insufficient to satisfy the offers Bar was making to solicitor
customers. This contributed to Berliner withdrawing from the UK market
potentially leaving a number of solicitors without Solicitors’ PII cover;

e)
acted recklessly, by continuing to commit Sinclair to reinsurance and
guarantee insurance liabilities despite the fact that he was aware that there
was a risk that the funds which were required to meet claims were frozen in
Cyprus; and

f)
is subject to a number of cease and desist orders (either in his own name,
or that of companies under his control) in Canada and the US. These orders
were imposed as Mr Reches and companies under his control were selling
insurance without the appropriate licences.

SANCTION

75.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of
DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority
applies a five-step framework to determine the appropriate level of financial
penalty. DEPP 6.5B sets out the details of the five-step framework that applies in
respect of financial penalties imposed on individuals in non-market abuse cases.

76.
The application of the Authority’s penalty policy is set out in Annex B to this
Notice in relation to Mr Reches’ breach of section 63A of the Act.

77.
In determining the financial penalty to be attributed to Mr Reches’ misconduct,
the Authority had particular regard to the following matters:

a)
the need for credible deterrence;

b)
the nature, seriousness and impact of the breach;

c)
the extent to which the breaches were deliberate or reckless;

d)
the risk of consumer detriment as a result of Mr Reches’ failings; and

e)
any applicable settlement discount for agreeing to settle at an early stage of
the Authority’s investigation.

78.
The Authority therefore imposes on Mr Reches a financial penalty pursuant to
section 63A(1) of the Act of £1,050,000 plus the Additional Penalty.

79.
The Authority has had regard to the guidance in Chapter 9 of EG (the relevant
provisions of which are set out in Annex A to this notice).

80.
Given the nature and seriousness of the failures outlined above, the Authority
considers that Mr Reches’ conduct demonstrated a serious lack of integrity.

81.
The Authority considers that Mr Reches acted recklessly in conducting regulated
activities whilst unapproved. Further, he failed to co-operate with the Authority’s
investigation.
It
is
therefore
appropriate
and
proportionate
in
all
the

circumstances, and supports the Authority’s consumer protection objective, to
prohibit Mr Reches from performing any function in relation to any regulated
activity carried out by an authorised person, exempt person or exempt
professional firm.

PROCEDURAL MATTERS

Decision maker

82.
The decision which gave rise to the obligation to give this Notice was made by the
Settlement Decision Makers.

83.
This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner of and time for Payment

84.
The financial penalty must be paid in full by Mr Reches to the Authority in the
manner outlined below:

a)
£1,050,000 in equal instalments of (i) £37,500 on or before 14 March 2016,
14 June 2016, 14 September 2016 and 14 December 2016; (ii) £75,000 on
or before 14 March 2017, 14 June 2017, 14 September 2017 and 14
December 2017; and (iii) £150,000 on or before 14 March 2018, 14 June
2018, 14 September 2018 and 14 December 2018.

b)
£13,130,000 less any amounts which the Authority has confirmed in writing
to Mr Reches and/or his legal representative that it is satisfied as having
been paid by Mr Reches to: Millburn, Balva and ERIC by no later than 1
February 2020, 48 months from the date of the Final Notice.

If the financial penalty is not paid

85.
In the event that Mr Reches does not pay any single instalment of the £1,050,000
in full within one month of its specified due date set out in paragraph 84 a)
above, then interest shall accrue on the unpaid instalment at the rate of 8% per
annum and in the event that Mr Reches does not pay any single instalment in full
within three months of its specified due date, the remaining sum of £1,050,000
plus accrued interest (less any amounts paid to the Authority) shall become
immediately due and the Authority may recover the outstanding amount owed by
Mr Reches as a debt owed by Mr Reches and due to the Authority, including
interest thereon at a rate of 8% per annum.

86.
In the event that Mr Reches does not pay the full £13,130,000 to Millburn, Balva
or ERIC, by 1 February 2020 (or has defaulted in making payments to one of

more of them and it is confirmed that Mr Reches is expected to remain in
default), the outstanding amount will become immediately due to the Authority
and the Authority may recover the outstanding amount as a debt owed by Mr
Reches and due to the Authority, including interest thereon at a rate of 8% per
annum.

87.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of
information about the matter to which this notice relates. Under those provisions,
the Authority must publish such information about the matter to which this notice
relates as the Authority considers appropriate. The information may be published
in such manner as the Authority considers appropriate. However, the Authority
may not publish information if such publication would, in the opinion of the
Authority, be unfair to you or prejudicial to the interests of consumers or
detrimental to the stability of the UK financial system.

88.
The Authority intends to publish such information about the matter to which this
Final Notice relates as it considers appropriate.

Authority contacts

89.
For more information concerning this matter generally, contact Paul Howick
(direct line: 020 7066 7954 /email: paul.howick@fca.org.uk) of the Enforcement
and Market Oversight Division of the Authority.

Financial Conduct Authority, Enforcement and Market Oversight Division


ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

RELEVANT STATUTORY PROVISIONS

1.
The Authority’s statutory objectives, set out in section 1B(3) of the Act, include
the consumer protection objective and integrity objectives.

2.
Section 56 of the Act provides that the Authority may make an order prohibiting
an individual from performing a specified function, any function falling within a
specified description or any function, if it appears to the Authority that that
individual is not a fit and proper person to perform functions in relation to a
regulated activity carried on by an authorised person, exempt person or a person
to whom, as a result of Part 20, the general prohibition does not apply in relation
to that activity. Such an order may relate to a specified regulated activity, any
regulated activity falling within a specified description, or all regulated activities.

3.
Section 63A of the Act provides that if the Authority is satisfied that a person
(“P”) has at any time performed a controlled function without approval and at
that time P knew, or could reasonably be expected to have known, that P was
performing a controlled function without approval, it may impose a penalty on P
of such amount as it considers appropriate. For the purposes of this section P
performs a controlled function without approval at any time if at that time P
performs a controlled function under an arrangement entered into by an
authorised person (“A”), or by a contractor of A in relation to the carrying on by A
of a regulated activity; and the performance by P of the function was not
approved under section 59.

RELEVANT REGULATORY PROVISIONS

The Fit and Proper Test for Approved Persons

4.
The part of the Authority’s Handbook entitled ‘The Fit and Proper Test for
Approved Persons’ (FIT) sets out the criteria that the Authority will consider when
assessing the fitness and propriety of a candidate for a controlled function. FIT is
also relevant in assessing the continuing fitness and propriety of an approved
person.

5.
FIT 1.3.1G states that the Authority will have regard to a number of factors when
assessing the fitness and propriety of a person. The most important
considerations will be the person’s honesty, integrity and reputation, competence
and capability and financial soundness.

DEPP

6.
Chapter 6 of DEPP sets out the Authority’s statement of policy with respect to the
imposition and amount of financial penalties under the Act.

7.
DEPP 6.5D.2G states that:

(1) In assessing whether a penalty would cause an individual serious financial

hardship, the FCA will consider the individual's ability to pay the penalty over

a reasonable period (normally no greater than three years). The FCA's
starting point is that an individual will suffer serious financial hardship only if
during that period his net annual income will fall below £14,000 and his
capital will fall below £16,000 as a result of payment of the penalty. Unless
the FCA believes that both the individual's income and capital will fall below
these respective thresholds as a result of payment of the penalty, the FCA is
unlikely to be satisfied that the penalty will result in serious financial
hardship.

(2) The FCA will consider all relevant circumstances in determining whether the

income and capital threshold levels should be increased in a particular case.

(3) The FCA will consider agreeing to payment of the penalty by instalments

where the individual requires time to realise his assets, for example by
waiting for payment of a salary or by selling property.

(4) For the purposes of considering whether an individual will suffer serious

financial hardship, the FCA will consider as capital anything that could
provide the individual with a source of income, including savings, property
(including personal possessions), investments and land. The FCA will
normally consider as capital the equity that an individual has in the home in
which he lives, but will consider any representations by the individual about
this; for example, as to the exceptionally severe impact a sale of the
property might have upon other occupants of the property or the
impracticability of re-mortgaging or selling the property within a reasonable
period.

(5) The FCA may also consider the extent to which the individual has access to

other means of financial support in determining whether he is able to pay the
penalty without being caused serious financial hardship.

(6) Where a penalty is reduced it will be reduced to an amount which the

individual can pay without going below the threshold levels that apply in that
case. If an individual has no income, any reduction in the penalty will be to
an amount that the individual can pay without going below the capital
threshold.

(7) There may be cases where, even though the individual has satisfied the FCA

that payment of the financial penalty would cause him serious financial
hardship, the FCA considers the breach to be so serious that it is not
appropriate to reduce the penalty. The FCA will consider all the
circumstances of the case in determining whether this course of action is
appropriate, including whether:

a)
the individual directly derived a financial benefit from the breach
and, if so, the extent of that financial benefit;

b) the individual acted fraudulently or dishonestly with a view to personal

gain;

c)
previous FCA action in respect of similar breaches has failed to
improve industry standards; or

d) the individual has spent money or dissipated assets in anticipation
of

FCA or other enforcement action with a view to frustrating or limiting the
impact of action taken by the FCA or other authorities.

The Enforcement Guide

8.
The Enforcement Guide (EG) sets out the Authority’s approach to exercising its
main enforcement powers under the Act.

9.
Chapter 7 of EG sets out the Authority’s approach to exercising its power to
impose a financial penalty.

The Authority’s policy for exercising its power to make a prohibition
order

10.
The Authority’s policy in relation to prohibition orders is set out in Chapter 9 of
the Enforcement Guide (“EG”).

11.
EG 9.1 states that the Authority may exercise this power where it considers that,
to achieve any of its regulatory objectives, it is appropriate either to prevent an
individual from performing any functions in relation to regulated activities or to
restrict the functions which he may perform.

12.
EG 9.17 states where the Authority is considering making a prohibition order
against an individual other than an individual referred to in EG 9.8 to 9.14, the
Authority will consider the severity of the risk posed by the individual, and may
prohibit the individual where it considers this is appropriate to achieve one or
more of its statutory objectives.

13.
EG 9.18 states when considering whether to exercise its power to make a
prohibition order against such an individual, the Authority will consider all the
relevant circumstances of the case. These may include, but are not limited to,
where appropriate, the factors set out in EG 9.9.

14.
The relevant factors set out in EG 9.9 are:

(1) the matters set out in section 61(2) of the Act.

(2) whether the individual is fit and proper to perform functions in relation to

regulated activities. The criteria for assessing the fitness and propriety of
approved persons are set out in FIT 2.1 (Honesty, integrity and reputation);
FIT 2.2 (Competence and capability) and FIT 2.3 (Financial soundness).

(5) the relevance and materiality of any matters indicating unfitness.

(8) the severity of the risk which the individual poses to consumers and to

confidence in the financial system.

(9) the previous disciplinary record and general compliance history of the

individual including whether the Authority, any previous regulator,
designated professional body or other domestic or international regulator
has previously imposed a disciplinary sanction on the individual.

ANNEX B

PENALTY ANALYSIS

1.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of
DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority
applies a five-step framework to determine the appropriate level of financial
penalty. DEPP 6.5B sets out the details of the five-step framework that applies in
respect of financial penalties imposed on individuals in non-market abuse cases.
The Relevant Period in this case is from 1 December 2010 to 23 September 2013
and therefore the five-step penalty framework applies.

Step 1: disgorgement

2.
Pursuant to DEPP 6.5B.1G, at Step 1 the Authority seeks to deprive an individual
of the financial benefit derived directly from the breach where it is practicable to
quantify this.

3.
The Authority has been unable to identify any significant income or direct financial
benefit that Mr Reches received personally in connection with the activities to
which the breaches relate.

4.
Step 1 is therefore £0.

Step 2: the seriousness of the breach

5.
Pursuant to DEPP 6.5B.2G, at Step 2 the Authority determines a figure that
reflects the seriousness of the breach. That figure is based on a percentage of the
individual’s relevant income. The individual’s relevant income is the gross amount
of all benefits received by the individual from the employment in connection with
which the breach occurred, and for the period of the breach. In determining the
relevant income, “benefits” include, but are not limited to, salary, bonus, pension
contributions, share options and share schemes and “employment” includes, but
is not limited to, employment as an adviser, director, partner or contractor. Mr
Reches provided evidence that he did not personally receive any relevant income
during the Relevant Period.

6.
The Authority considers Mr Reches received no relevant income during the
Relevant Period.

7.
In deciding on the percentage of the relevant income that forms the basis of the
Step 2 figure, the Authority considers the seriousness of the breach and chooses
a percentage between 0% and 40%. This range is divided into five fixed levels
which represent, on a sliding scale, the seriousness of the breach; the more
serious the breach, the higher the level. For penalties imposed on individuals in
non-market abuse cases there are the following five levels:

Level 1 – 0%
Level 2 – 10%
Level 3 – 20%
Level 4 – 30%
Level 5 – 40%


8.
In assessing the seriousness level, the Authority takes into account various
factors which reflect the impact and nature of the breach, and whether it was
committed deliberately or recklessly.

9.
DEPP 6.5B.2G(12) lists factors likely to be considered ‘level 4 or 5 factors’. Of
these the Authority considers the following factors to be relevant:

a)
The actions of Mr Reches in diverting the premiums away from the insurers
with responsibility to pay claims arising from policies provided him with an
indirect benefit. In particular, money from premiums paid by customers was
used either by Mr Reches or by companies of which he was the sole or
majority owner, to expand their business, for example by purchasing Balva
and Millburn (DEPP 6.5B.2G(8)(a)).

b)
Mr Reches’ misconduct and recklessness created a significant risk of loss to
consumers.
By
diverting
premiums
away
from
the
insurers
with

responsibility to pay out on claims, policyholders have been left at risk of
their policies not paying out in the event of a claim. As a result, the FSCS
has made payments in excess of £9.1m with its forecast final liabilities being
£28.8m (DEPP 6.5B.2G(8)(b)).

c)
Mr Reches’ misconduct and recklessness contributed to failings in cover in
three consecutive years in parts of the Solicitors’ PII market. These actions
had an adverse effect on the Solicitors’ PII market, particularly in respect of
the orderliness of and confidence in this market (DEPP 6.5B.2G(8)(f)).

d)
The failure of the reinsurer, Sinclair, which is owned and controlled by Mr
Reches was a significant factor in the administration and FSCS default of
Millburn, ERIC and Balva (DEPP 6.5B.2G(8)(f)).

DEPP 6.5B.2G(9) – Factors relating to the nature of the breach:

a)
The Authority considers that throughout the Relevant Period, Mr Reches
behaved with a lack of integrity in that he acted recklessly (DEPP
6.5B.2G(9)(e)).

b)
Mr Reches is an experienced insurance/reinsurance professional and has
over 40 years’ experience in the insurance industry in markets across the
world. He holds senior positions in a number of companies involved in the
insurance and reinsurance market (DEPP 6.5B.2G(9)(i)).

c)
Mr Reches’ actions in carrying out a controlled function were conducted in
relation to a regulated activity in that his actions were directly connected to,
or in pursuit of, sourcing, arranging and executing insurance and
reinsurance contracts. As such, in relation to a contravention of section 63A,
he performed controlled functions at Aderia without approval and, while
doing so, committed misconduct in respect of which, if he had been an
approved person, the Authority would have been empowered to take action
pursuant to section 66 (DEPP 6.5B.2G(9)(q)).

d)
For the reasons outlined at paragraphs 59–61 above, the Authority
considers that Mr Reches could reasonably be expected to have known that
he
was
performing
a
controlled
function
without
approval
(DEPP

6.5B.2G(9)(r)).

DEPP 6.5B.2G(11) – Factors tending to show the breach was reckless:

a)
Mr Reches appreciated or could reasonably be expected to have appreciated
there was a risk that his actions or inaction could result in a breach and
failed adequately to mitigate that risk (DEPP 6.5B.2G(11)(a)).

DEPP 6.5B.2G(12) - Factors likely to be considered ‘level 4 or 5 factors’:

a)
Mr Reches’ failures exposed customers to significant risk that insurers with
which their policies were held would not be able to pay out legitimate claims
and thereby cause loss and detriment to those customers; his actions
contributed to one UK insurer (Millburn) and two European insurers (ERIC
and Balva) going into administration and resulted in the FSCS having to
make substantial compensation payments (DEPP 6.5B.2G(12)(a)).

b)
Mr Reches failed to act with integrity, in that he was reckless (DEPP
6.5B.2G(12)(d)-(g)).

10.
Taking all of these factors into account, the Authority considers the seriousness of
the breach to be level 5 and so the Step 2 figure is 40% of £0.

11.
Step 2 is therefore £0.

Step 3: mitigating and aggravating factors

12.
Pursuant to DEPP 6.5B.3G, at Step 3 the Authority may increase or decrease the
amount of the financial penalty arrived at after Step 2, but not including any
amount to be disgorged as set out in Step 1, to take into account factors which
aggravate or mitigate the breach.

13.
The Authority considers that the following factor aggravates the breach:

a) Mr Reches has not cooperated fully and openly with the Authority’s

investigation. He has failed to meet deadlines for responses and failed to
reply either fully or at all to a number of important information requirements,
to the extent that non-co-operation is one of the reasons why the Authority
considers Mr Reches is not a fit and proper person (DEPP 6.5B.3G(2)(b)).

14.
Having taken into account this aggravating factor, the Authority considers that
the Step 3 figure should be increased by 30%.

15.
Step 3 is therefore £0.

Step 4: adjustment for deterrence

16.
Pursuant to DEPP 6.5B.4G, if the Authority considers the figure arrived at after
Step 3 is insufficient to deter the individual who committed the breach, or others,
from committing further or similar breaches, then the Authority may increase the
penalty.

17.
The Authority does not consider that a penalty of £0 is sufficient to act as a
credible deterrent to the market (DEPP 6.5B.4G(1)(a)).

18.
The Authority considers that a penalty comprising a punitive element of £1.5m
together with the Additional Penalty to deprive Mr Reches of the indirect benefit
he has received from his misconduct is required at Step 4 figure to act as a
sufficient credible deterrent. This is because the Authority considers that:

a)
Mr Reches has received an indirect benefit from his misconduct amounting
to £13.13m;

b)
Mr Reches’ actions were particularly serious in that they exposed numerous
consumers to significant risk of loss and contributed to the failure of three
insurers;

c)
Mr Reches’ actions led to millions of pounds of premiums paid by customers
being diverted away from insurers at his direction, or to companies in which
he had an interest or exercised control over; and

d)
Mr Reches’ actions have had a substantial impact on the FSCS leaving it
with significant liabilities.

19.
Step 4 is therefore £1,500,000 plus the Additional Penalty.

Step 5: settlement discount

20.
Pursuant to DEPP 6.5B.5G, if the Authority and the individual on whom a penalty
is to be imposed agree the amount of the financial penalty and other terms, DEPP
6.7 provides that the amount of the financial penalty which might otherwise have
been payable will be reduced to reflect the stage at which the Authority and the
individual reached agreement.

21.
The Authority and Mr Reches reached agreement at Stage 1 and so a 30%
discount applies to the punitive element of the Step 4 figure. The 30% discount
does not apply to the Additional Penalty referred to in paragraphs 23 to 24 below.

22.
Step 5 is therefore £1,050,000 plus the Additional Penalty.

23.
Mr Reches has indicated to the Authority that he intends to pay £13,130,000 to
three insurers, namely ERIC, Balva and Millburn. This payment will deprive Mr
Reches of the indirect benefit that the Authority considers he has gained from his
misconduct in directing payments out of Solicitors’ PII premiums. These monies
will make a substantial contribution towards the liabilities of these insurers,
including liabilities to the FSCS and UK policyholders. All three insurers have been
declared in default by the FSCS. Other UK policyholders are creditors in the
liquidations or administrations of these insurers and will therefore benefit from
these payments.

24.
If and to the extent that any or all of the sum of £13,130,000 is not paid at the
end of the agreed payment term, such sum will be due and payable to the
Authority as an additional penalty.

25.
The Authority has therefore imposed on Mr Reches, a combined penalty of
£1,050,000 plus the Additional Penalty.