The comments follow on from a report in FTAdviser sister title Financial Adviser last week, which highlighted that the FSA had requested information on PII details in a letter that some advisers suggested could be a precursor to a consumer redress scheme.
The letter, seen by FTAdviser, is a notice under section 165 of the Financial Services and Markets Act 2000. In the letter, James Barcroft of the City watchdog’s supervision division, requests that a select number of firms supply a copy of their current PII policy, as well as a copy, if different, of any previous policy that covers or might cover liability in respect of any Arch Cru complaint.
Joe Egerton, campaigns director at JFS, believes that the letter raises a “worrying possibility” that few, if any, firms that made personal recommendations will be able to demonstrate compliance with the FSA’s theshold conditions.
Mr Egerton added that, as most PI policies are unlikely to cover Arch Cru and regulatory rules mean that advisers must hold capital to cover any potential claims not covered by their PI policy, the letter could be a precurser to the regulator putting firms out of business.
He said: “These inquiries are well suited to the FSA issuing demands that firms stop trading at once and hand over their assets to the Financial Services Compensation Scheme.”
According to Mr Egerton, the relevant FSA rules are set out in chapter 13 of the Interim Prudential Source Book for Investment Business.
He said: “The current FSA rules require each firm to have capital to cover claims that will not be met by its current PI policy.
“Almost every current PI policy excludes cover for CF Arch Cru products, so rule 13.1.24G allows the FSA to require firms to hold capital to the full extent of possible liabilities to clients in the case of advice to invest in CF Arch Cru products.
“Under rules 13.1.21 and 13.1.22, advisers will only be able to rely on PI cover in respect of specific claims that have been notified under a policy that covers these and only to the amount the insurer is liable to pay. Most investors have not made specific claims and previous general notifications of claims do not meet the requirement of 13.1.22 (1) (b).”
Mr Egerton said that the total of sums that would be payable could be established on the basis of the “notorious” decision by the Financial Ombudsman Service, which required the IFA in the case to pay redress of the initial investment and its original expected return, plus the Bank of England base rate plus one per cent.
Mr Egerton said: “For the purpose of determining whether your firm meets company act solvency requirements... you are certainly allowed to assume that when you notified an insurer that a circumstance that might give rise to a claim had arisen, any policy under which you could make a claim would respond.
“You are also – unless and until the FSA successfully implements a consumer redress scheme – entitled to take a view both on the likelihood of complaints being made and the likelihood of the complaint being upheld by Fos and on the timing of any award that might be made.
“You can also take into account the possibility of legal and political challenges. Until recently the FSA rules allowed you to take a similar approach, not any more. The FSA rules thus place almost all advisory firms in an impossible position.”
