In our May 2018 note, we discussed aspects of the Financial Conduct Authority (FCA) consultation paper CP18/11 ("Reviewing the funding of the Financial Services Compensation Scheme (FSCS)") which concerned, amongst other things, professional indemnity insurance (PII) arrangements for personal investment firms (PIF). In particular, the FCA was concerned about the impact PII insolvency exclusions were having on FSCS funding and proposed introducing a rule which would prevent PIFs from buying PII policies which excluded claims where the policyholder or a related party is insolvent.
Having received and considered consultation responses on the issue, on 16 November 2018 the FCA published Handbook Notice 60 which confirmed that the FCA is proceeding with its proposal. This is despite some concerns being raised during the consultation that the proposed new rules have the potential to increase costs for firms in terms of increased premiums and reduce PII availability.
The current FCA rules relating to PII for PIF firms are contained in chapter 13 of the Interim Prudential Sourcebook for Investment Businesses (IPRU-INV). New rules will be introduced (rules 13.1.20A to 13.1.20D, inserted by the Professional Indemnity Insurance (Insolvency Exclusions) For Personal Investment Firms Instrument 2018) which provide that the PII policy:
- must not limit (by exclusion or excesses or otherwise) cover which would otherwise be provided by the policy following the insolvency of the PIF itself, or a person or fund relevant to a potential claim;
- must not limit cover where a person other than the firm (for example, the FSCS or a customer pursuant to the Third Parties (Rights Against Insurers) Act 2010) is entitled to make a claim on the policy; and
- must include a statement confirming that the policy complies with these new rules.
While it remains the case that the obligation to ensure compliance with the FCA's PII rules fall on the PIF and not on insurers, the FCA has stated that it may review whether a requirement for insurers (i.e. preventing insurers from including such exclusions in their policies akin to the way General Provision (GEN) 6 of the FCA Handbook prevents insurers from providing cover for FCA fines and penalties) is appropriate at a later date if the FSCS provides the FCA with evidence that it has encountered difficulties pursuing recoveries due to such exclusions.
Emphasising the continued importance of senior management responsibility, the FCA also observed that as the responsibility for purchasing appropriate insurance sits with the senior management of PIFs "…action can be taken against individuals for any breaches even if the firm itself has failed."
These changes will come into force on 1 June 2019.