Suspecting fraud within your organisation is a very tricky situation. It is a dilemma that the Whistleblowers Act was supposed to have solved. But as many have found out the Act does not seem to have solved anything at all.
The problem differs depending on the kind of business the brokerage undertakes. If it the company is a life brokerage, the issue becomes very complex with the Financial Services Authority or Personal Investment Authority looming in the background. But this does not mean general insurance brokers would have an easier ride, as those who have been through such a scenario will testify.
One City non-marine broker explains the trauma he experienced when he suspected fraud within a brokerage. Dealing with over £400k gross premium income he strove to ensure minimum damage was inflicted on himself, his client and insurers.
The incident unfolded as follows:
He first suspected a problem when a cheque for a few hundred pounds bounced. His initial concern caused him to hold up cheques to the owner of the organisation. But then he realised he couldn't do that as the cheques were not addressed to him – much of his account was through other insurance intermediaries.
He phoned up the intermediary and asked it to keep issuing the bordereaux but not to issue any cheques, while he waited to see what was going on. On a few direct clients he got them to pay the insurers direct.
When he was certain all was not well, he went to tell the insurers what was going on and went to see a solicitor, who advised him that he should come in at the weekend when it was empty and remove all his files.
In order to continue supporting his clients and to protect his own business he decided he should trade directly and in his own right.
He had to calculate how much money had gone missing from his side. As this created a great deal of work, he subsequently lost commission. Also he had to stop trading for a while as it would have been illegal. The dark web of procedure was extremely tight. And to cap it all there were other problems which arose such as the non-payment by creditors. "I was getting aggravation from all sides" he says.
One insolvency specialist, Ian Williams, at City firm of licensed insolvency practitioners Benedict Mackenzie, says the broker in question took exactly the right steps.
"There are weaknesses in the law with respect to general insurance. The insurance brokers account (IBA) was clearly not being run in a proper manner: monies were coming out for purposes other than the payment of premium. If this had been a Lloyd's broker, the controls over those accounts would have been very strong, with charges which effectively would have enabled the account to have been brought under control immediately the prospect of the company's insolvency emerged.
"But in a small company which is not a Lloyd's broker it seems to me there are no real controls: there is no body which can swoop in as Lloyd's can and take control of that account. So staff in such a company do have difficulty if they are dealing with their clients. Monies coming in should be recorded of course and should be then utilised in the proper manner. But if you have someone who is determined to use the money for other purposes there seems to be very little legal pressure to be brought immediately."
Avoid the management
If an employee suspects impropriety within the IBA, Williams warns that he or she must not become involved in the management of the company. "Always assuming an insolvency follows, this would involve fraudulent manipulation," he explains.
"The best thing to do is to note and write formally to the management of the concerns, and record them as such. At least the issue has then been brought to notice. What to do next depends on the response received to that concern. If the director says "It has nothing to do with you 'I have complete control'then the employee is in a very difficult position and must ensure as far as he or she is able that his or her clients pay direct to the insurance company. Sadly that is all that can be done at that stage," he says.
Williams holds serious reservations over the value of whistleblowing.
"I suggest that if you are in any doubt at all you should take legal advice from a suitably qualified solicitor. Unfortunately, that is a necessary investment of personal funds, or you could get yourself in the realms of slander and libel if your information proves to have been inaccurate," he says.
He adds, though, that if the individual happens to know an insolvency practitioner, the likelihood is that he or she could arrange a free initial consultation which in many cases could prove productive. "That's certainly the way most insolvency practitioners operate. Each case of course will have its own particular problems. There may be some merit in looking through the lists of the Insolvency Practitioners Association."
Resigning may be the answer
"Your ultimate sanction as an employee is to resign, get out, and be careful what you say to your clients."
He says: "Rather like estate agents brought into line with the Estate Agents Act, brokers ought to be regulated. Having said that, insurance broking collapses are rare and if a broker is of a certain size then it usually is saved one way or another. Fraudulent cases happen very rarely.
"I would like the insurance trade bodies to be brought into line with regulation but there is a danger of commercial lines becoming over-regulated, so it must be ensured that the regulation is not worse than the occasional failure.
"But at the moment it is far too voluntary and trade bodies should be allowed to mature with some grip and power to enable their members to operate with other people's money and accounts in a proper manner. They need the ability to descend upon a member if there is a serious or suspected difficulty to determine whether or not there is one."
Chief executive of BIBA Mike Williams disagrees. "Regulation is an irrelevance when it comes to whistleblowing," he insists. "It doesn't matter whether you have the most powerful, statutory or voluntary form of regulation. It is not going to prevent people from abusing the system, from breaking rules and from getting away with it. The fact that there is a law does not stop law breakers, and it leaves whistleblowers in exactly the same position.
"The problem is that there is no protection for the whistleblower – nowhere to go, nobody to turn to, no advice one can get, no simple method of ensuring anonymity or of avoiding the consequences of reporting malpractice or problems to the authorities."
His advice is to use the system as much as possible, which means getting professional advice from experts in employment law or in the regulating section in question. This is likely to be the lawyers or the regulators themselves.
"There is no way round it," he says. "BIBA will point members in the right direction. We retain specialists in all aspects of company law who will do this, a service we provide free of charge and confidentially."
Andrew Paddick, director general at the IIB, agrees that the situation is extremely difficult for employees who suspect the owners of their organisation to be fraudulent, and says the best thing to do is resign and to take their book of business to another employer.
"Every case rests on its own merits, and every employee should be careful about whistleblowing." he says.
But he adds that in the event of a non-compete clause being presented as an impediment to an employee's departure, that employee should argue that the employer's conduct has nullified that contract.