FCA bans PI insolvency exclusions

FCA bans PI insolvency exclusions

Advisers will be banned from taking out professional indemnity insurance policies which limit cover in cases of insolvency, the Financial Conduct Authority has announced.

The change will come into effect on June 1, 2019 and follows a consultation on the proposal as part of the regulator's attempts to reform the Financial Services Compensation Scheme (FSCS) levy.

The change will mean advice firms will have to have PI insurance which does not limit cover where the policyholder or a third party is insolvent, or where a person other than the advice firm, such as the FSCS itself, makes a claim on the policy.

This comes after the FCA's board agreed to change the regulator's handbook at a meeting yesterday (November 15).

The FCA claimed the change could cut the cost of the FSCS levy to advice firms because it would mean more claims were being paid by insurers rather than from the compensation scheme's levy, which is funded by advisers.

Around half of those who responded to a consultation on this issue earlier in the year supported the proposals, agreeing it was important firms had PI policies which were fit for purpose.

The majority of respondents who disagreed with the proposals expressed concerns about increased costs for firms and reduced availability of PII and the consequences that this could have on both financial services firms and consumers.

Indeed the FCA said it met with insurers and brokers to find out what the impact of this change could be and while most said the majority of policies did not currently contain relevant exclusions and would not see premiums increase, one large insurer said the policy could increase premiums by up to 25 per cent.

In response, the FCA said: "We note the concerns raised in the responses about increased costs for firms and a reduced availability of PI insurance. However, a number of stakeholders and respondents [...] told us that they have not seen recent examples of policies containing such exclusions.

"The analysis set out in the cost benefit analysis [...] indicates that even if the intervention resulted in a 25 per cent increase in premiums this would on average be affordable. In any case, we consider that this is likely to be an overestimate of the impact in practice."

As part of this process the FCA considered mandated policy terms with no exclusions but this was rejected because it was likely to result in PI insurance becoming either unavailable or unaffordable, which could force firms out of the market and reduce the availability of advice.

Dan Farrow, director of SBN Wealth Management, said his PI premiums had been going up for the past few years and he would be concerned if insurers used this as an opportunity to increase them again.

He said: "This seems technically and legally challenging and something that I think would be challenged by PI insurers, but anything that reduces the burden on IFAs who act appropriately and in the best interests of their clients should only be welcomed."