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By Donia O'Loughlin | Published Jul 26, 2012

FSA board ‘uncertain’ over whether PI will meet Arch claims

The Financial Services Authority’s board had “uncertainties” as to whether professional indemnity insurance will meet Arch Cru claims in the event of it launching its £100m section 404 scheme, according to minutes of a meeting just days before the scheme consultation was published.

The minutes from an FSA board meeting held on 26 April reveal that several members had concerns regarding the FSA’s proposed Section 404.

Three days later, the FSA launched a three-month consultation on establishing a consumer redress scheme for Arch Cru investors, which could deliver more than £100m compensation to investors from adviser firms that recommended the funds.

Should the scheme go ahead, the FSA has confirmed that it would become effective as of January 2013.

In the FSA minutes, board members are reported to have questioned whether or not PI insurance would cover the redress liability through the scheme for many firms.

The concerns would appear to be prescient. Earlier this week, the regulator warned insurers against avoiding claims to the detriment of consumers in a Dear CEO letter, after adviser firms complained that many were rejecting notifications of potential claims in the wake of the scheme being launched.

Indeed, some PI experts have warned that PI cover for cases such as Arch Cru is being heavily scrutinised by insurers due to the high level of claims and fears over whether this is affordable.

For example, while the current redress scheme is seeking in excess of £100m, Neil Pointon, director of Howden Insurance Brokers, said that total PI premiums in the adviser sector only amount to around £40m.

He said: “Professional indemnity insurance is there to cover acts of errors and omissions and negligence. It isn’t really designed to provide a product guarantee which is the way it seems to be skewed towards.”

The FSA board was also split as to whether the redress scheme should go ahead at all, noting a “significant number of firms affected” could fail if a Section 404 scheme was used. There was also “major concern” about the cost pressure on the Financial Services Compensation Scheme.

However, the FSA executive agreed that the Section 404 scheme would provide the “most effective route” to deliver the greatest level of overall redress to the highest number of consumers.

However, it warned that some consumers would get less total compensation through the Section 404 scheme than through a complaints-led scheme, as the calculation of redress under the proposed scheme was based on various alternative investments depending on the consumer’s attitude to risk.

In contrast the Financial Ombudsman Service would be likely to use the Bank of England base rate as a comparator, the board said.

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