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PI and providers in firing line as FCA publishes long-awaited FSCS proposals

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The FCA has released its long-awaited consultation on reforming the Financial Services Compensation Scheme.

Among a number of options, the regulator is considering introducing mandatory wording on professional indemnity insurance policies for personal investment firms.

The consultation also contains further options for strengthening PI cover, including ensuring policies provide cover for any FSCS claims, restrictions on policy excess levels and restricted use of exclusions for some products.

The consultation confirms introducing a risk-based levy is an option, where firms could be eligible for a discount if their behaviour reduces risk or fund a greater share if they are involved in high risk product sales.

In order to make this possible, the FCA has proposed adding information on higher risk investment products to advisers’ Gabriel returns. This would come in the form of two questions, asking advisers if they recommend investments such as non-mainstream pooled investments, and if so, how much of their income comes from these areas.

The FCA says: “While many intermediary firms that distribute non-mainstream pooled investments will do so responsibly, those that do not may pose a higher risk of defaulting and creating significant liabilities for the FSCS. Although it is hard to predict which firms are most likely to trigger significant FSCS claims, we are interested in the relationship between past FSCS claims and non-mainstream pooled investments and we intend to investigate this further.”

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The FCA is also considering updating the limits on consumer coverage following the pension freedoms.

Product provider contributions could increasingly fund the lifeboat fund as the FCA laid out three options for changing the FSCS funding classes.

They are:

  • Merging the four current intermediation classes with product provider contributions from all providers from the first pound of any claim.
  • Merging investment intermediation and life and pensions intermediation with product provider contributions from relevant provider classes from the first pound of any claim.
  • Keeping the current intermediary class structure with increased product provider contributions from the relevant provider classes from the first pound of any claim.

PI pressures

The FCA commits itself to a review of the PI market next year in the consultation, citing concerns over the available and coverage of insurance policies.

The paper says: “There are relatively few PII providers in the personal investment firm market, and some firms can find it difficult to buy appropriate PII policies. We have also seen evidence that some PII policies do not fully meet claims and exclude important aspects from their cover. As a result, although PII was intended to be one of the main ways for these firms to protect their clients, it is not necessarily reliable.

“Instead, the FSCS has increasingly taken on the role of ‘first line of defence’ when a firm fails. We will look at the requirement for these firms to hold PII and its effectiveness to help inform a review of the PII market we will carry out in 2017.”

The regulator is asking for views on whether additional requirements for ‘run-off’ cover or legal cost provision should be put in place to bolster PII policies.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. The FCA seem to say there’s a problem with obtaining PII and that many policies have too many exclusions, I fail to see how insisting policies have no exclusions and cover FSCS claims is going to do anything to help – in fact surely it’s going to result in an ever decreasing pool of PII providers shrinking further and withdrawing from the Market.

  2. Should read: “The regulator is considering reintroducing mandatory wording on professional indemnity insurance policies for personal investment firms.”

    Why was the mandatory wording removed from the rule book many years back?

    The fact remains that PI is a waste of money, up to half of it goes in commission and there are so many issues with clauses that quite often it will be worthless even if the FCA gets its way.

    Regulation is bust.

  3. Quite agree. Forcing insurers to adopt greater cover will either put up premiums or excesses further and result in insurers withdrawing from the market – so bringing on exactly that which the FCA wants to avoid. I really can’t blame the PI insurers, who would want to be a PI provider in the current regulatory climate? There has been no stability of regulation since 1998 (A-day remember that?) with a new regulator on average every 5 years; each bringing its own hot topic to concentrate on. Add on top of these numerous “thematic reviews” (aka retrospective rule-making) and an adjudication service (FOS) which acts capriciously and outside the rule of common/cvil law; the thing I find surprising in the FCA’s comments is a) they seem surprised there is a problem, b) the problem is one of PI insurance T&Cs and not the FCA et al’s actions which should be slimmed down,and made more efficient/effective. Until the FCA recognise that they contributing to this problem there will be no solution.Regulation needs to be proportionate to the risk and with due regard to the regulated. The overbearing FCA needs slimming down to be an effective risk-focussed regulator concentrating (more limited) resources in areas of greatest need – not the bureaucratic all-fingers-in-all-pies behemoth it now is. But then again turkeys don’t vote for Christmas.

    Again the consultation begins with the FCA setting the terms of the debate and the questions to be answered. So it will also get the answers it wants. Then a cost benefit analysis of changes will be produced (again on the FCA’s terms with no independent verification of the CBA nor how realistic the assumptions used were) to give exactly the answer the FCA had wanted at the outset.

    I remember the FSA producing a CBA which demonstrating how post-RDR the extra costs to regulated firms would be easily outweighed by the benefits to consumers, the industry and the economy. Yet interesting I note that when the FCA took over the remit they stated that they were “fairly sure” that the costs of RDR would be outweighed by the benefits but more work needs to be done. No we have FAMR.

    When I am done with the FS industry I an wing to write a book…

  4. The whole PII issue is totally “broke”. If the FCA insist on mandatory wording and no exclusions etc, the PI insurers will simply stop selling it. Then what will the FCA do? The answer is very simple – scrap the PII requirement and we all just use the FSCS. The FCA openly admit this is the first port of call. As PII in the round does not work for IFAs now anyway, the FSCS won’t notice any great increase in claims compared to now. We can all save some money by not having the PII.

  5. PII is excellent value compared with other professions – and about half the price of solicitors PII, and a third of the price of surveyor’s PII.

    • Errr Charlie that is the problem, and why it is rubbish, our PI policies are akin to driving a Bugatti with brakes made out of milk bottle tops, now on the flip side if the said brakes where corrected it would then be akin to the cost of a 17 year old insuring this Bugatti on a provisional licence.

      See Evan Owen’s post above !

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