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FSA warns PI insurers over Arch cru exclusions

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.”

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. The FSA are worried that,,now they have caused the proverbial to hit the fan, there may be no one left to allow them to enjoy their gardens.
    They know full well they cannot make PI insurers pay up, they are just making noises.
    It did not occur to them when they got herbie smith to threaten IFA’s, that their PI would not pay out.
    Same with Arch Cru. The FSA live on another planet which is full of other peoples money.
    The whole system is about to implode, watch it and weep.

  2. David Parkinson 24th July 2012 at 3:02 pm

    Lets face it if the FSA had done it’s job & made other parties take responsibility then the PI Insurers would not have to worry as much. As it is they will pick up the tab along with FSCS-Passed onto IFA’s via Levy & so on…. Stones & glass houses again!

  3. I find it amazing that we work in an industry where the insurance covers when a claim is made not when the ‘action’ that caused the alleged loss was carried out.

  4. I concur with the above comments.

    However, unlike IFAs, the combined might of PI insurers and their lawyers could make for an interesting battle with the FSA, if the insurance companies take a class action to the Upper Tribunal.

    Picture this discussion:

    FSA: “Dear PI company, our friends at Crapita may (alledgedly) have cocked up and lost clients lots of money by mis-pricing investments, and not spotting that their appointed fund managers had squandered the money on second-hand oil tankers and dodgy property schemes.

    Since we love them so much, we’d rather blame the mess on IFAs, who are too small to fight back. Therefore, please can you send us a cheque for £110 million. Love, the FSA”.

    PI Insurers’ lawyer: “No, sod off! You failed to spot that Arch were as dodgy as Christmas, when you authorised them, and you are trying to blame IFAs, even though you haven’t even published your finding on what went wrong. I wonder why!

    As for IFAs being at fault – why did you authorise the final Arch fund ….. which took place after your ARROW visit that found evidence of mispricing …. and how can the funds have been high risk in fact, when the published fund price history (which has now been removed from the internet) was remarkably stable. Unless, Crapita hadn’t bothered to properly check the books ……

    Let’s discuss this in Court, where the rule of causation will apply and we can wash your dirty laundry in public”.

    If only!

  5. If anybody has issues with their PI insurer over notifications given please get in touch.

  6. How come the FSA didn’t warn PII insurers against avoiding Key Data claims?

    Anyway I don’t suppose it has occurred to the geniuses at Canary Wharf that the way they are going they will be lucky if any PII insurer will cover financial advisers at all.

    This warning will only serve to ensure that even more PII insurers withdraw from the market. And then what the brain boxes at No 25 do?

    They seem to have forgotten – or never really knew – the first law of insurance:

    “Take the premium and fight like mad against any claims”

    The reason the PII is so expensive and that the insurers are so wary is precisely because the regulator has made it a fact of life for any customer that whatever happens the IFA will pay out. Even if we have to use judgements in retrospect. You may not have a snowflakes chance in Law, but fear not we’ll get you compensated.

    Then of course they don’t realise either that if they load ever more claims onto the PII insurers then next year premiums will be even less affrordable – until hardly anyone has the wherewithal to buy one. As it is most of us regard PII as disaster insurance and would be loath to claim if at all possible.

    In the early days of FIMBRA (and I note that today even G Jillings has posted elsewhere a criticism of the FSA) PI insurance was perfectly affordable. I recall paying (before it was compulsory) £250 for annual cover.

    This whole business of blame and compensation is one of the less edifying aspects of modern life. Sure gross examples (PPI) should be sanctioned, but who would argue that the present situation is one of overkill.

  7. Stable door this re Arch Cru?

    As it happened when Keydata was shut down, my firm had paid for 2x PI policies running at the time- one under our former network which we’d left during the year, one a new policy as then become directly authorised. We advised we had 1 client in Keydata and gave notice just in case – the PI brokers responded saying no complaint or claim had arose (it never has actually against us from the client), therefore no notifiable event had happened so our notification didn’t stand. When the next renewal came up, anything to do with Keydata was excluded.

    At the time we weren’t worried as the 1 client was v high net worth, medium risk, v modest investment for diversification ….. shame this doesn’t seem to help with Herbert Smith? I went back to the PI broker once Herbert Smith sent their nice letters and was told although we’d notified correctly at the time, as the notification wasn’t acceptable then despite the HS actions this now belonged to our current PI cover – which of course is excluding Keydata….

    PI seems not worth a jot, we’ve got to have it but does it ever pay out?

  8. Larry in London 24th July 2012 at 7:09 pm

    O.P.M.

    Other People’s Money

    The brainy geezers in Canary Towers really don’t get it. An insurance company is not liable for a loss if that liability is covered elsewhere. The FSA created a situation in which compensation can be paid to clients by another channel. The PII insurers will simply sit on their hands until that channel is exhausted and then, and only then, will they have any liability.

    This is Insurance 101 but the Canary Whingers don’t understand insurance law. Doh!

    Pathetic.

  9. For the record, this Anonymous | 24 Jul 2012 6:10 pm is not my posting.
    Other than that, no comment.

  10. @ Harry Katz
    You say “How come the FSA didn’t warn PII insurers against avoiding Key Data claims?”

    Put 2 and 2 together.. QBE were my PI insurers before Keydata hit the fan. Check who was one of the directors and what panels they sat on at the FSA and then look at who got a knighthood.

    I am not suggesting that there was insider dealing, but it is very difficult to raise a chineese wall in your own head as I am currently finding with Keydata myself.

    I think most of a solicitors, regulators and politicians training must be about how to erect Chineese walls when it suits…. and remove them when it doesn’t.

  11. @ Anonymous 6.34am
    I truly hope one of the journalists reading this will actually investigate what you say and challenge this thoroughly. Nothing surprises me anymore. Its prob what the Govt mean when they say they are “all in it together”

  12. In all probability, PI insurers are not, any more than the rest of us, prepared to accept that FSA “consultations” are anything of the sort, not least because the FSA refuses to publish any responses to them for all to see and to debate in open forum. Rather, FSA “consultations” are just statements of intent, the outcomes a foregone conclusion from the word go, with the FSA claiming merely to have “taken on board” the responses received. That’s not consultation, it’s just a sham.

    Furthermore, the PI insurers probably don’t see why they should accept the FSA’s blanket determination, in an attempt to abrogate responsibility for its own failings, that all recommendations to invest in ArchCru funds were mis-sales. They’ve been there before with the PIA’s hindsight pensions review and they aren’t going to allow the regulator to screw them all over again under its now very tattered and torn flag of consumer protection. Says Adamson, with weary predictability “we are certainly prepared to consider taking action where insurers seek to breach or avoid their obligations to the detriment of consumers”. The thing is, Mr Adamson, only the FSA considers the PI insurers to be under any such obligations. The PI insurers don’t but, as usual, the FSA refuses to listen. We’re the FSA and, if we say something’s so, then you just have to go along with it and pay up. If you don’t, we’ll send the boys round to give you a good kicking. Well, maybe this time they won’t just buckle under.

    So what can the FSA do if the PI insurers stand firm and say no, this is wrong, YOU’RE wrong, this is just another FSA witch-hunt and we aren’t going to pay.

    Impose fines (leading to expensive, time-consuming and wasteful law suits, which I for one would hope very much that the PI insurers win)?

    Shut them down (which will reduce market capacity even further and lead to even more intermediary firms having to shut down because they can’t get cover)?

    Try to impose its own revisions on their policies (go take a running jump)?

    It’s another fine mess, based on the FSA, as usual, trying to dump onto everybody else responsibility for its own failings. Yet again, this highlights the need for an Independent Regulatory Oversight Committee with the unassailable authority to say to the FSA: This is wrong and you aren’t going to do it. That’s the only way to rein in this unbridlede monster that rides roughshod over anyone or any body that dares to try to stand in its way.

  13. Larry in London 25th July 2012 at 10:34 am

    Would the last person to leave the industry please switch off the shredder.

    Thank you

    Larry

  14. Similar experience with PI insurers. We notified circumstance to insurer in July 2010 when it was clear that Keydata had gone belly up. PI Insurer didn’t even acknowledge receipt of letter. 2 weeks later when we renewed our policy Keydata was excluded. Roll on to 2012. We wrote to PI insurer on receipt of Herbert Smith’s letter – 3 months on we are still waiting for a response as to whether we are covered or not. Appalling service. If we ran our businesses the same way we would be closed down. PI insurers -a complete waste of time!

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