The Financial Services Authority has issued a warning over regulatory responsibilities after banning and fining the former executive chairman of Mitsui Sumitomo Insurance Company (Europe) in a move that could deter Japanese firms from expanding into the UK.
Not only did the FSA ban Yohichi Kumagai and fine him nearly $200,000, it also imposed a fine of £3.345 million ($5.4 million) on the parent company MSIEU "for serious corporate governance failings".
"Senior management must take responsibility for the firms that they run,” says Tracey McDermott, acting FSA director of enforcement and financial crime in London. “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 resulted in significant sanctions for both him and MSIEU. 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.”
The regulator found that Kumagai was seconded to the UK arm of the company in April 2009 as part of the traditional Japanese system of rotating senior staff into and out of international positions.
Shortly after he was appointed, the FSA wrote to him to say that if the firm was to expand into Europe – mainly through new business in France and Germany with non-Japanese clients – then it would need to make new appointments to the board.
"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," the FSA statement read. "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."
In particular, the FSA asked him to appoint a chief underwriting officer. He also failed to implement a new IT system which would have provided the board with the requisite management information, especially focusing on risks.
The FSA move is a clear shot across the bows of the traditional Japanese system of rotating senior people in and out of global positions and could deter the future expansion of other Japanese businesses into the UK.
Even so, in a statement to Bloomberg, the firm acknowledged that it was at fault. Mitsui Sumitomo “accepts the FSA’s final notice and takes this matter very seriously”, says Duncan Gallagher, a spokesman for the firm, in an e-mailed statement.
“The company is disappointed that during this period its corporate governance and controls were not up to the standards the company expects.”