An advice company has been told to relinquish its defined benefit permissions after the Financial Conduct Authority refused to accept adequate capital as a means of self-insuring future work.
The regulator has been reluctant to allow advisers to self-insure DB work, despite its handbook permitting additional capital to be held in place of adequate professional indemnity insurance for both past and future work.
The adviser in question, who wished to remain anonymous, told Financial Adviser their company was instructed to relinquish its transfer permissions despite never having a complaint and holding enough capital under the FCA’s requirements to self-insure its liabilities.
The adviser, who was visited by the FCA as part of its market-wide DB review, said that while the watchdog would accept capital adequacy to self-insure back book work, it would not do so for future liabilities.
The advice company had secured a £500,000 PI policy to cover its DB work, but this was £750,000 short of its full liabilities – an amount that the company had intended to account for via its capital position.
But the FCA told the company it must either find “top-up” cover from another insurer or vary its permissions and relinquish DB activity.
Gary Kershaw, compliance director of SimplyBiz, said the issue of self-insurance was “contentious and complex”.
In the policy statement that addressed increasing the award limit for the Financial Ombudsman Service, the FCA said personal investment firms can hold policies that exclude activities the company is conducting, or has conducted in the past, if “the firm holds additional capital to meet their potential liabilities in the absence of [PII] cover”.
But the FCA statement added: “Despite being permitted by our rules, our concern is that holding additional capital resources in place of PII may be a particularly inappropriate approach where a firm’s policy excludes riskier, higher value activities, such as [DB] transfers.
“This is because a personal investment firm’s self-assessment of potential liabilities for determining how much additional capital it should hold might not match a PI insurer’s more rigorous analysis of the underlying exposure.
“This approach could, therefore, provide less consumer protection than [PII]. It could result in more firm failures and affected consumers having to seek compensation from the [Financial Services Compensation Scheme], which operates a lower limit than the ombudsman service.”
As a result, meeting the FCA’s capital adequacy rules is no longer enough to satisfy its growing scrutiny of the DB sector.
Mr Kershaw added: “Although the FCA handbook does state that it is possible for advisers to self-insure, our experience over the past month or so is that the FCA is reluctant to allow this principle to apply.”
It is thought that the FCA does not typically consider it reasonable for a company to continue undertaking business that is excluded in their PI policy, such as DB pension transfer activity.
Keith Richards, chief executive of the Personal Finance Society, was not aware of specific instances where the FCA had refused to let advisers self-insure for past liability.
He said: “If an adviser is unable to secure [PII] cover for new advice, they would be forced to cease trading, but bizarrely many are self-insuring for past advice liability, either through significantly increased excesses or exclusions, which is an untenable situation for individuals and the future of the profession more widely.”
The FCA declined to comment.
rachel.mortimer@ft.com
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