Letting compensation costs fall onto the Financial Services Compensation Scheme rather than firms’ personal indemnity insurance goes against the principle that the “polluters pays” for their failure, the FCA has said.
In board minutes from its November meeting released today, the watchdog criticises PII providers for previously seeking to limit their liabilities when firms fail, and for preventing the FSCS from making claims on policies.
The FCA’s board minutes says: “The board recognises that, if the cost of compensation falls to the FSCS rather than the insurer, it is ultimately borne by those firms that remain in the industry. Spreading the risk across all surviving firms does not follow the ‘polluter pays’ principle.”
The minutes show just over three quarters (78 per cent) of claims submitted to PII insurers by personal investment firms in the last decade have been paid by a combination of the PII and the excess.
The FCA says it is questioning the degree to which PII is effective in the wake of its 2016 review into FSCS funding.
The review found that PII mostly works well for firms, but not for those that have engaged in large scale misselling scandals.
Effective funding of the FSCS funding continues to prove difficult, with the lifeboat fund announcing the introduction of a £69m levy for 2019 to cover its shortfalls this year.