During the course of 2016 the FCA undertook a wide-ranging thematic review of the Broker PI market, the first since the new regulator was established. The aim was to identify cases of non-compliance with the minimum requirements for insurance mediation activities set out in section MIPRU 3.2 of the FCA Handbook. Their findings were released in December and should make for concerning reading for many firms as a high incidence of non-compliance was discovered, posing a significant regulatory risk for brokers of all shapes and sizes across the UK.
Griffiths & Armour were consulted at a number of stages during this review. As a result we can confirm that clients who currently take advantage of our exclusive Broker PI Scheme facilities, underwritten by Arch Insurance, have cover that is fully compliant. This is part of our promise to ensure that our clients benefit from policy coverage of the highest specification – and it is regularly reviewed.
For this review, the FCA took a sample of 200 brokers of varying shapes and sizes and looked at the factors which they saw as critical to effective PI protection, both for Brokers and their clients. This included limits of indemnity, levels of self-insured excess and the width of policy coverage – a summary of their findings can be found here:
Click here for FCA Report 2016
Interestingly the FCA did find a small number of firms who did not purchase PI with limits of indemnity in accordance with the minimum requirements of MIPRU or had policy excess levels above those permitted. An important factor that was perhaps beyond the current brief of the FCA was whether firms are purchasing sufficient levels of PI cover to match the underlying exposures they face. Rather than leave it to the FCA to decide what level of cover should be purchased, we continue to recommend that all our broker clients regularly take time to assess the underlying exposures they face and whether the level of PI cover they have is sufficient to adequately cover those risks. As specialists in the field of Brokers PI, Griffiths & Armour act as informed advisers to our Broker clients and are on hand to assist firms when they are considering such a critical question for their business.
The question of qualifying with the maximum permitted level of self-insured excess as a percentage of turnover depends on whether a firm holds client money or not but MIPRU is clear on this point. What may complicate this question on occasion is that Brokers can also choose to have a level of excess above the permitted level, but only if they maintain additional levels of capital; we also advise our clients on the specifics of these requirements wherever necessary.
What turned out to be the main area of interest to the FCA arising from the review findings, and where the majority of failings were discovered, was the width of policy coverage and the presence of onerous exclusions. As is very common within the PI market, it was discovered that there are wildly differing extents of cover across the Broker PI segment from one provider to the next; this is something the FCA were very keen to investigate further. Although MIPRU is relatively prescriptive as to the requirements of what a Broker PI policy must cover, the appearance of certain onerous exclusions across a broad array of different wordings was highlighted by them as very concerning.
The main points of concern that were raised were as follows:
- Exclusions surrounding the suitability of Insurer – which could be applied widely and therefore be considered very dangerous.
- Exclusions in respect of the use of (a) non-rated insurers, or (b) non-admitted insurers – very alarming for firms who place cover with insurers that fit these descriptions (or those who may via facilities but don’t know it).
- Full Insolvency exclusions – standard within Broker PI policy wordings.
- Unsuitable cover in respect of appointed representatives and Financial Ombudsman Service awards – either cover excluded or at inadequate levels to comply with either current requirements and/or to address multiple FOS awards.
Again, it is pleasing to be able to confirm that neither of the first two exclusions highlighted by the FCA appear in our Broker Scheme policy wordings and in addition to this, our wording also contain a generous insolvency write-back for firms that have sufficient risk management procedures in place. Furthermore, cover is automatically provided for all appointed representatives disclosed to insurers and the amount of cover in respect of FOS awards is significantly higher than required (and would continue to provide effective support if there were multiple awards in the same policy period). If you have any concerns or queries in relation to this then please feel free to get in touch with us.
Following this review, the FCA has already raised the various issues with those firms that were found to be non-compliant in order to ensure corrective action has been undertaken. They are also engaging with the sector through relevant trade bodies and other stakeholders so that the issues emerging from the review are properly understood. We would expect there to be further action and commentary over the coming weeks and months. In the meantime, it is the responsibility of all Brokers to check their own PI policies to ascertain whether they are adequate, and try to resolve any non-compliant areas.
We understand that this is an area where Brokers may require the benefit of more specialist advice and we would be pleased to discuss any aspects of this FCA review with our clients or with firms who do not currently benefit from the quality of cover and level of expertise offered by Griffiths & Armour.
In addition to the above advice, we have a brief document you can download to learn more about what is an adequate limit of indemnity.
Adequate Limits Article
If you would like to discuss your current PI protection or the changes in FCA requirements further, please contact your usual point of contact at Griffiths & Armour or Matthew MacLaren on 0151 600 2272 or email: firstname.lastname@example.org.