UK: FCA's Renewed Interest In PII Arrangements For Regulated Firms

Last Updated: 13 September 2017
Article by Laura Cooke and Keira Carver

The prudential rules of the UK financial services regulators require that certain regulated firms maintain professional indemnity insurance ("PII") and provide certain minimum criteria to be met (depending on the size and type of regulated activity which the firm undertakes). However, the regulated financial services sector is not currently required to maintain mandatory PII subject to standardised terms in the way that other professions are (for example, solicitors).

In December 2016, the Financial Conduct Authority ("FCA") published two documents regarding PII held by regulated financial services firms. The motivation behind the FCA's reengagement with PII issues appears to be the strained funding position of the Financial Services Compensation Scheme ("FSCS") and comments in last year's Financial Advice Market Review's final report on the efficacy of the PII market for smaller advice firms . The FSCS has had to foot a considerable bill in recent years arising out of the collapse of a number of insurers and also firms who have given unsuitable investment advice to customers.

Thematic Review: General Insurance Intermediaries

Overview

The FCA's thematic review of the effectiveness of the PII market for general insurance intermediaries (TR16/9) evaluated the individual policies purchased by a sample of 200 firms (from a population of approximately 6,000) to assess whether they complied with the FCA requirements.

Key Findings

The FCA found there is sufficient breadth within the market to provide choice, and that firms were able to obtain cover for high limits of indemnity. However, concerns were raised regarding exclusion clauses within policies which could reduce the level of cover below that required by the FCA's relevant prudential rules (the "MIPRU"). Those types of exclusion clause were: (i) suitability of insurer; (ii) unrated insurers; (iii) non-admitted insurers; and (iv) insurer insolvency.

The review also identified a high level of inaccuracies or gaps in coverage, which indicates that the policies have not been subject to appropriate review. Examples include a lack of clarity as to whether policies provided cover for awards by the Financial Ombudsman Service ("FOS") and out of date language.

Next Steps

Following the review, the FCA raised clear examples of noncompliance with the firms at issue and ensured that corrective action was taken. Those insurance intermediaries that were not included in the review are expected to review their own PII policies to ensure that they meet the relevant requirements. Similarly, the FCA expects insurers that provide such policies and managing general agents to review their products in light of the FCA's findings, to ensure they are consistent with the needs of the intermediaries and meet the necessary requirements. Where the FCA has identified issues, they are considering whether there is a need for further regulatory action.

Consultation Paper: Funding of the FSCS

Overview

The second publication touching on PII is the FCA's paper regarding the funding of the FSCS (CP16/42). The FSCS is the UK's statutory compensation scheme of last resort, compensating individuals and small businesses for losses when authorised financial services providers are unable to pay claims. The paper includes a section dedicated to a consideration of PII for "personal investment firms" (including financial advisers and other intermediaries). In particular, the FCA has sought views on the current and future interaction between a firm's PII and FSCS cover.

The paper follows a statement by the FCA chief, Andrew Bailey, in November 2016 that PII is not always performing reliably in the financial advice sector, as insurers were frequently writing contracts that excluded losses in this area, leaving the FSCS to make payments. He called on the insurance industry to put forward ideas as to how to make the PII market work more effectively.

Key Issues

The consultation puts forward various proposals regarding how PII in the financial services industry ought to be revised. The FCA has raised concerns with the impact that existing PII requirements appear to have on the FSCS such that the FSCS has become the "first line of defence" in many instances where a firm fails. The FCA is seeking views with a view to improving the reliability of PII so it acts as a "front stop" ahead of firms failing and resulting claims being made on the FSCS.

The paper invited submissions on whether the FCA should introduce more comprehensive mandatory PII cover, such as requirements to have run off cover in place and additional requirements for legal defence costs. The FCA recognises that defence costs can often be high in the event of a claim and the current Handbook guidance says it is not considered reasonable for a firm's policy to treat defence costs cover as part of the limits of indemnity if this reduces the cover available for any individual larger claim. The paper questions whether the PII market is working, acknowledging that there are few providers in the market and some firms find it hard to purchase appropriate cover.

The paper identifies a number of issues in the PII market in the personal investment firm arena, and the FCA's desire to address indications that PII is not functioning as effectively as it should. Some firms have reported to the FCA that they find it difficult to purchase appropriate PII cover or, in some cases, any PII cover at all. Moreover, the FSCS and other industry stakeholders have provided evidence to the FCA that not all PII policies respond adequately to claims made. In particular, some polices exclude the insolvency of the policyholder or the FSCS as a claimant.

The paper focuses, in particular, on exclusions, recognising that Insurers can find it hard to price the risks inherent in the financial advice market but that, for example, product exclusions can leave firms unprotected if they chose to provide certain types of advice. In the FCA's view, the analysis shows that there is justification for strengthening PII, particularly for personal investment firms through the use of, for example, mandatory terms.

Comment

Clearly the FCA views PII as an important protection for firms and customers. However, the prevailing view of the regulator appears to be that too much is falling to the FSCS and if FSCS funding reforms are to be successful, reforms will also need to be made to PII cover in the financial services sector.

Part of the problem with financial adviser's PII is as a consequence of changing expectations of the regulator, unpredictable FOS outcomes (which decides cases on a "fair and reasonable" basis, and not strictly in accordance with established legal principles) and the associated uncertainty as to exposures that these practices bring for insurers.

Enforcing standard wording and extending the level of cover required will undoubtedly raise the overall cost of PII cover through the imposition of higher premiums (and so, cancelling out if not exceeding any savings for firms in terms of reduced FSCS levies). It may also lead to some insurers withdrawing from the already relatively small market.

The consultation period closed on 31 March 2017 and it is currently expected that the FCA will publish a further consultation paper on proposed rule changes in autumn 2017.

R (Aviva Life & Pensions (UK) Ltd) v Financial Ombudsman Service [2017] EWHC 352

When determining a complaint, the FOS must do so by reference to what is fair and reasonable in all the circumstances, taking into account all relevant law, guidance and practice.1 It has been accepted as the law and referred to in decisions for many years that the FOS can depart from the relevant law, guidance and practice provided the ombudsman explains its reasoning to do so. However, this successful application for judicial review, where the High Court quashed the FOS' decision, highlights the importance of the ombudsman to take relevant law, guidance and practice into account when making decisions and give full reasons for its decisions when departing from it.

Mr and Mrs McCulloch took out a 23-year joint life policy in 2006 which they cancelled, in 2013, when they separated. In November 2013, Mr McCulloch applied for a single life policy on his own from Aviva, but failed to disclose on the application form: that he had been consulting his GP in relation to possible mental health issues since September 2013, that he had been referred for psychiatric assessment, and that he was awaiting a CT scan. He later sought to claim for terminal illness benefit following being diagnosed with a rare terminal form of earlyonset dementia identified by the CT scan. Aviva declined the claim on the grounds of misrepresentation, and avoided the policy owing to negligence or careless, rather than innocent, non-disclosure. Aviva stated that it would not have offered the policy if disclosure had been made.

The FOS decided that special consideration had to be given to Mr McCulloch's illness as he could not be expected to make the same disclosures expected of a reasonable person and, accordingly "[i]n cases of innocent misrepresentation, the appropriate remedy is to disregard the information that wasn't included in the application form. So Aviva should reinstate the policy on its original terms and consider Mr McCulloch's claim". Aviva sought judicial review of the decision.

The High Court decided that the Ombudsman had not given sufficient reasons for its decision nor had it followed the relevant law, guidance and practice. The FOS' jurisdiction was derived from the Financial Services and Markets Act 2000 and when exercising its compulsory jurisdiction, a complaint had to be determined with reference to what was, in the opinion of the ombudsman, fair and reasonable in all the circumstances and this included taking into account relevant laws and regulations and, where appropriate, good industry practice at the relevant time. When the ombudsman did not follow the relevant law, guidance and practice (as it is entitled to do so), it is incumbent on the ombudsman to explain why it had not. It was not disputed that Aviva had followed the relevant law, guidance and practice and so, as a result, its decision was not prima facie unfair or unreasonable. At the same time, it would not be unreasonable for the FOS to hold the insurer to its contract given the unusual circumstances of the case. However, if it did, careful reasons had to be given for any lawful decision to uphold a complaint In light of its conclusions, the High Court quashed the Ombudsman's decision with the effect that the FOS had to reconsider the complaints.

Footnote

1. FCA Handbook Disp 3.6.1R and 3.6.4R.

FCA's Renewed Interest In PII Arrangements For Regulated Firms

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.