The FSA has warned professional indemnity insurers it is prepared to take action against insurers attempting to sidestep their liabilities in relation to Arch cru claims.
The regulator sent a Dear CEO letter to PI insurers earlier this month following an industry forum on PI cover in June.
In the letter, FSA conduct business unit director of supervision Clive Adamson (pictured) says the regulator’s proposed £110m consumer redress scheme for Arch cru investors has sparked concerns from advisers that PI cover will not be in place for Arch cru claims.
Adamson says: “Since we released our consultation paper, we have been contacted by IFAs who are concerned their PII cover may not operate as they expected it to. Specifically, firms have told us they have attempted to notify their insurers of circumstances which are likely to lead to a claim or, under certain policies, may lead to a claim, and have been told such notifications cannot be made simply on the basis that the FSA is consulting on a proposed consumer redress scheme.
“These firms are concerned that when they come to renew their policies, cover for Arch cru claims will be excluded and they will therefore face significant liabilities to consumers without the benefit of any insurance cover.”
Advisers have also raised concerns with the FSA that failure to secure PI cover for Arch cru claims will mean firms are forced to hold additional capital.
Adamson adds: “To be clear, it is not our intention to dictate what risks insurers should cover, nor are we seeking to require insurers to go beyond the cover as described in the relevant PII policies, but we are certainly prepared to consider taking action where insurers seek to breach or avoid their obligations to the detriment of consumers.
“We would remind insurers of their contractual and/or common law duty to act with due regard to the interests of their insured.”
The FSA has also asked PI insurers to provide details on how it deals with notification issues about potential claims, and the renewal terms they are offering to firms who recommended Arch cru funds.
The regulator has also asked for the average excess for IFA firms, if different excesses apply for non-Arch cru firms, whether Arch cru sales have been excluded from policies and the reasons for those exclusions, and the questions asked of Arch cru firms on renewal.
The FSA set out plans to establish a £110m redress scheme for Arch cru investors in April. If it goes ahead, advisers who recommended Arch cru funds will be required to review their Arch cru sales to assess whether they were suitable, and if not pay redress. The scheme is separate to a £54m payment scheme for Arch cru investors in June agreed with the FSA between Capita, HSBC, and BNY Mellon. The consultation on the £110m redress scheme closes on July 31.
Howden director of retail Neil Pointon says: “The question is whether underwriters have grounds to exclude cover now because they are saying the redress scheme is not a notifiable event at this point in time. I do not know if that is the case, but my advice is advisers should look to notify about claims and not wait until the Arch cru consultation is completed.”
IFA Solutions managing director Jamie Newell says: “Every PI policy is different, particularly when it comes to notification of claims. It is a very grey area.”