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PI and providers in firing line under FSCS proposals

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.

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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.”

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.

It said it is also welcoming views on other areas of PII, such as insurance for mortgage and insurance intermediaries.

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