The pressures placed upon the owners and senior managers of personal investment firms have continued to grow as a result of changes brought about by regulation. What some have failed to appreciate is what the consequences could be as a result of not paying attention to the detail when dealing with the regulator, as well as insurers and suppliers.
Two examples will help illuminate these challenges – one in the here and now, and the other demonstrating the need to be mindful of what lies ahead. The first concerns professional indemnity insurance. It is all too easy to assume the wording provided by your firm’s PI policy is similar, if not identical, to others on offer and therefore to focus predominantly on the level of the policy excess and the premium. But have you checked, or are you confident your broker has?
For example, how familiar are you with the difference between the alternative “may” versus “likely” wording? Some PI policies still contain the following notification condition: “If during the period of this certificate the insured, in their reasonable opinion, consider that any information of which they are aware may give rise to a claim or loss under the terms of this certificate then the insured must give notice to insurers of such information as soon as practicable.”
However, the majority of PI wordings for financial advisers now contain a notification condition, which requires you, as the insured to notify information of which you are aware is likely to rise to a claim or loss under the terms of the policy (often defined /referred to as a “circumstance”) and only at that point will cover for such notification be triggered/considered; or, you, as the insured to notify information discovered by you which suggests that a claim or loss by an identified claimant is more likely than not to be made against you, and only at that point will cover for such notification be triggered/considered.
These are progressively more onerous in the context of what information would be considered an acceptable notification under the policy.
Some PI wordings go even further than that and actually clarify what would not be considered a “circumstance” – for example, a product or class of investment that is the subject of regulatory investigation.
“May” is a wide threshold that effectively admits the notification of any matter which might give rise to a claim or loss, whereas “likely” is somewhat narrower and the notification needs to be more probable than not. If you change from a “may” to a “likely” notification condition, it can be very difficult to reverse it at a later date.
The fundamental point is that you should make the time and effort to know what your current PI policy does and does not cover and be very clear what any alternative policy proposed covers before you agree to change insurers, even if at first glance the excess(es) are similar and the premium more competitive. Gaps or shortfalls in cover could place your firm in a perilous position if claims arise which are not covered and there could be recriminations if it is later found cover could have been arranged.
The second challenge is the senior managers and certification regime. On 15 October, the Government announced it is proposing to extend the senior managers and certification regime to all sectors of the financial services industry; not just to banks and insurance companies. It has decided to introduce a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This will apply across all authorised financial services firms.
The senior managers regime shifts responsibility from the regulator to the firm for vetting and certifying most of the customer-facing staff, and extending direct regulatory responsibilities to a number of staff not previously requiring approval from the FCA.
Advice firms will have to check not only whether staff are competent enough to do their job but also whether they have the integrity to do it. These checks will need to be performed at outset and annually thereafter.
The proposed changes will not take effect until 2018 and could be altered in the meantime. But what is your internal process for keeping track of such proposed changes so that you are well prepared in advance and have fully considered the implications?
Minding your business and keeping on top of the detail has never been more important.
Roderic Rennison is director of The Ideas Lab