The regulator has unveiled radical plans to force product providers to pay more towards the cost of failures in the financial sector and to stop professional indemnity insurers from shirking their responsibility to payout when advice firms go bust.
In papers published today (1 May) the Financial Conduct Authority announced it will implement proposals made in its October consultation on the funding of the Financial Services Compensation Scheme (FSCS), while also looking for ways to include professional indemnity insurance (PII) in the mix.
This morning the FCA confirmed it will require product providers to contribute about 25 per cent of the compensation costs which fall on advisers.
It will also merge the life and pensions and investment intermediation funding classes, and move pure protection intermediation to the general insurance distribution class.
But the regulator does not want to stop there. It is also looking for ways to force advisers' PI insurers to cover some of the cost of compensation by allowing the FSCS to claim against a defaulted firm’s insurance.
Currently, advice firms are required to maintain PII which provides an adequate level of cover and meets certain limits of indemnity.
But the FCA said it was aware some PII firms had put in place exclusions, such as a general insolvency clause or an FSCS-specific exclusion, that meant the FSCS was unable to bring a claim on the policy.
The FCA now proposes to ban this practice by imposing a new rule on all PII policies effected or renewed from the date this rule takes effect.
It stated in its paper: “We are aware that historically, some PII providers have sought to limit their liability by preventing the FSCS from making a claim on the policy.
“This has been achieved either through a specific clause, or by relying on insolvency clauses which exclude claims that relate to the insolvency of the firm or of third parties.
“Where a firm has, for example, provided negligent financial advice for a consumer to invest in a fund, we do not believe a claim on that firm’s PII should be excluded by virtue of the insured or the fund becoming insolvent, provided the claim has been notified correctly and the product is not otherwise excluded.”
The FCA said it wanted to ensure more consumer claims are paid by insurers, which could help to reduce the cost of the FSCS to other firms.
However, the plan could backfire if more insurers exit the market or raise their premiums.
The FCA had already proposed alternative options to enable more claims to be paid for by firms or their insurers in its October paper but has decided to drop those.
In particular it had mulled forcing advisers with no PII cover for high-risk business lines to pay capital into a trust account or to force all personal investment firms to purchase a surety bond which pays out in the event of FSCS claims arising.
The regulator received a number of responses to those proposals most of which were supportive, though some warned the proposals could increase cost for firms and create barriers to competition for smaller firms, particularly given existing capital adequacy requirements.