Background
In January 2020, the FCA wrote a Dear CEO letter which outlined Professional Indemnity (PI) Insurance as one of their top concerns. The FCA’s key fears centred around financial advisers holding insufficient financial resources or PI insurance to rectify instances where it is demonstrated that clients have suffered harm, ultimately placing a burden upon the FSCS and other firms through the FSCS levy.

There was reference to numerous points which are of concern to the FCA including the following: 

• where firms have exclusions for particular business lines, i.e. providing advice on Defined Benefit (DB) transfers);
• where large excesses are present on claims which result in the cover being largely ineffective;
• where the regulatory sub-limits are not met in relation to certain business lines i.e. less than the €1.85m for ‘IDD’ firms.

The FCA has made it clear that where any of the above circumstances are present, the PI cover is not considered to be compliant and they will be focusing on this area as part of their ongoing supervisory work. 

Exclusions
We have seen PI insurers implement a number of limitations and/or exclusions over the past few years, particularly in relation to DB transfers. For example: 

• No insistent client transfers;
• No British Steel cases;
• Maximum number of transfers from one scheme (such as a maximum of 10 transfers out of one scheme);
• No transfers to young clients (typically under the age of 50);
• No transfers into SIPPs;
• Non-regulated introducers. 

Firms should be aware that these exclusions will apply to business written going forward but may also apply to legacy business and care should be taken to understand the implications from a risk management perspective.
 

Excesses
As with exclusions, we have seen examples where large excesses are in place, which effectively could mean that the PI insurer will never pay out and that the advising firm would be solely liable for redress. This has been compounded by the Financial Ombudsmen Service (FOS) claim limits increasing from £160,000 to £350,000 in April 2019.
 

Ensuring sufficient cover
Firms are required to have:

• Compliant PI insurance at all times;
• PI insurance to cover current and past business with no break in cover (where there is to be a break, the firm should immediately inform the FCA). 

Note that where the PI insurance policy is denominated in a currency other than euros, then the policy needs to offer at least the equivalent level of cover required by the rules at the time the cover commences.

Firms engaging in insurance distribution activity, home finance mediation activity, and/or Mortgage Credit Directive article 3(1)(b) credit intermediation activity should refer to the PI insurance requirements under chapter 3 of MIPRU.  

Category B personal investment firms and exempt Capital Adequacy Directive (CAD) firms should refer to the PI insurance requirements under Interim Prudential sourcebook for Investment Businesses. That can be accessed here.
 

What happens if a firm has non-compliant PI cover?
We recommend the following actions in the event a firm becomes aware of non-compliant PI cover: 

• Stop advising on the excluded areas;
• Inform the FCA of non-compliance;
• Calculate what additional capital is required and use the Excess/Exclusions tables;
• Ensure the firm takes a business-led analysis as some of the additional capital required by the Excess/Exclusions table may be insufficient to cover potential liabilities;
• Identify if the firm can secure compliant cover;
• Consider how the firm will deal with the pipeline of business;
• Consider a variation of permissions.