The FCA said there was a case for strengthening the PII cover of personal investment firms in particular, as it launched a major review.
The regulator has laid out various potential changes to Professional Indemnity Insurance today.
This comes as part of the review of the funding of the FSCS.
New rules to tighten the specific level of cover required from PII policies were floated, with the regulator saying that these could mean that PI insurers would cover some of the claims that would otherwise be paid by the FSCS.
An FCA report, released this morning, stated: “Tightening rules could also prompt firms to stop riskier practices in order to get cover or to pay less for it. While we already have rules on the PII firms should hold, we will consider whether it may be necessary to consult on further amendments at a later date, to make our rules more explicit and comprehensive.”
Reaction from the Personal Finance Society below.
An FCA report, released this morning, stated: “Our analysis so far shows there is justification for strengthening PII, particularly for PIFs, for example through the use of mandatory terms.
“Our focus on PIFs (including financial advisers and other intermediaries) reflects the scale of claims made in the investment intermediation and life and pensions intermediation classes in the past five years.
“We are using this paper to gather further evidence and views before undertaking a detailed review of available data and evidence during 2017. Depending on the outcome we may consult on draft rules.”
Officials emphasised the importance of PII, saying: “in cases where firms’ systems and controls fail to prevent detriment, we believe that PII should provide a front stop to either prevent the firm’s failure from occurring or the consumer detriment that could result from it.”
Officials said that if the FCA decides to propose any rule changes, it will consider how best to make those consistent across different types of firm, taking in insurance for mortgage and insurance intermediaries.
The FCA is also reviewing whether it should require firms to hold more comprehensive insurance policies.
It stated: “This could be justified if we found evidence that firms with more comprehensive PII were better protected against liabilities, more able to meet claims against them and less likely to be declared in default. This would reduce the burden on the FSCS and help to transfer costs to the firms most responsible for generating claims, through increased insurance premiums.”
The report said a more comprehensive PII policy might have the following features:
• no exclusions for the insolvency of the policyholder or of the FSCS as a claimant (meaning that the policy must provide cover for any FSCS claims) regardless of the legal status of the firm
• restricted use of limitations (policy exclusions for particular intermediated products)
• additional restrictions on policy excess levels (which could apply to individual or multiple claims)
• additional requirements for legal defence costs
• restrictions on requirements for the policyholder to notify the insurer about future possible liabilities, potentially widening the circumstances in which an insurance policy pays out
• additional requirements to have in place ‘run-off’ cover
Reaction
PFS chief executive Keith Richards said: “The Personal Finance Society first proposed the idea of merging the FSCS levy with the cost of professional indemnity insurance, and I’m pleased that this consultation will offer stakeholders an opportunity to put forward their views on potential reforms of both systems.”
“We have previously expressed our concern about the current shortfalls of PII, and we are pleased that the FCA has acknowledged these by proposing restrictions on policy excess levels and restricted use of exclusions. These proposals need to be examined in greater detail, and it is equally as important that greater competition in the PII market is achieved through the current review.”
The FCA has posed the following questions for professionals to respond to during the consultation.
Q4: Do you have any views about the current effectiveness, or otherwise, of PII cover including in reducing the number and cost of claims on the FSCS, and about the role of PII in providing compensation to consumers who have claims against failed firms?
Q5: Do you have any views or suggestions about the possible features of more comprehensive, mandatory
PII insurance? Do you have any suggestions about other possible tools, remedies or approaches which could be used to reduce the scale of funding currently required by the FSCS?
Q6: Do you have any views on the impact of a requirement on PIFs to hold more comprehensive PII? For example, what would be its impact on the PII market, the financial advice market and on consumers in general?