The FCA has also issued a 'Dear CEO' letter, setting out its expectations of all insurers who provide, or have provided, professional indemnity insurance (PII) to firms which gave defined benefit (DB) pension transfer advice to BSPS members between 26 May 2016 and 29 March 2018, and to all brokers that arranged that cover.
The Redress SchemeConsumers covered by the redress scheme will have the pension transfer advice that they received assessed by advice firms. If the consumer suffered a loss because of unsuitable advice, firms will be required to pay redress. Where firms find that the advice was suitable, consumers will have the option to refer their cases to the Financial Ombudsman Scheme (FOS).
In the face of strong industry opposition, including serious concerns expressed about the robustness of the statistical modelling conducted by the FCA and the methodology of assessing suitability under the 'DBAAT' tool used by the FCA to assess suitability, the FCA maintains that BSPS is a a "highly exceptional case", with the FCA's evidence suggesting that 46% of transfers were unsuitable – much higher than the industry average for DB transfers.
Availability of PII cover for BSPS claimsIn the initial Consultation Paper, the FCA factored into its cost-benefit analysis the potential indemnity payments that would be claimed by advisers under PII policies. That was met with strong criticism, with respondents suggesting that the FCA should revisit its figures and querying why the PII redress figures factored in a difference of only £2.3m under an opt-out scheme compared to an opt-in scheme.
The FCA now accepts that it "may have overestimated PII providers' willingness to cover redress" and accepts that far fewer claims will be covered than it expected. Following what it describes as "discussions with a specialist insurance counsel and a review of policy terms and conditions", the FCA now concedes that no cover will be available for claims arising from the redress scheme for a large proportion of firms, as an opt-out process would not satisfy notification requirements for a valid claim under many PII policies. The FCA also confirms that the work it has conducted suggests that the claims-made nature of PII policies means that there is likely to be little or no PII cover available if a redress scheme is implemented, because most policies have been renewed and now include a specific BSPS exclusion.
The FCA acknowledges that this was the "worst-case" scenario modelled in the Consultation Paper. It also concedes that any PII policies which do cover BSPS claims will be subject to much higher premiums and excesses, "regardless of a firm's reputation or track record in its quality of advice". Responses to the consultation suggest that average excesses are £50,000 per claim, rather than the £25,000 per claim that the FCA had estimated. The updated cost-benefit analysis therefore assumes that firms within in the scope of the scheme will have no PII cover available to cover any redress liabilities. This will inevitably result in a greater share of the redress burden being borne by firms, though the FCA has not revised its estimate of the number of firms that will be driven out of the market as a result.
Of concern for PII providers, the FCA also suggests that it is "considering how we can assist firms if insurers wrongly refuse to accept notifications of a claim prior to renewal". Many insurers in the market have already expressed concerns about the FCA's increased willingness to take action to deal with what it considers to be market non-compliance; this comment underlines the risk that the FCA will take action to compel insurers to provide cover where possible.
'Dear CEO' Letter to PII providersIn the 'Dear CEO' letter, the FCA explains that it has now published the scheme rules. It also explains that firms will be required to assess the adequacy of their financial resources to meet potential liabilities arising from BSPS advice – which will include consideration of the availability of any PII cover.
The FCA says that whilst consulting on the scheme it became aware that many BSPS advisory firms are concerned that their PII cover may not respond to claims in connection with matters covered by the scheme, and that this has resulted in "uncertainty" more generally on whether PII providers will meet claims that may result from the scheme. The FCA says that advisers will want to have certainty about the extent of their PII cover, and that any cover in place "responds appropriately" to claims in connection with the scheme. Certainty about coverage also supports the FCA's core objectives of ensuring protection for consumers and ensuring that markets function well. The FCA wants insurers to understand its expectations in relation to the information needs of their policyholders, and how to deal with claims made under PII policies in connection with the scheme.
The FCA further says that it expects insurers to provide policyholders with an 'indication of cover' on request – that is, an opinion on whether their PII policies are likely to respond to claims about BSPS advice, based on the information available at the time of the request. The FCA has said it expects such information to be "readily available" to insurers, given their obligations to understand the cover they provide – and that it expects this information to be provided to BSPS scheme firms without delay. When providing that indication of cover, insurers should be able to say whether policies will provide cover; and where policies are not expected to respond to claims, insurers should be able to explain why. Any other relevant information, such as notification processes, ought to be drawn to policyholders' attention at that time.
The FCA also states that where BSPS scheme firms have made notifications or claims, the FCA expects insurers to consider notifications promptly and fairly – including whether historic notifications have already engaged cover – to communicate the outcome of the notification to firms, and to handle claims "promptly and fairly". The FCA will be encouraging insurers to develop or maintain approaches that facilitate and expedite the reporting and consideration of claims that may arise as a result of the redress scheme, with "no unreasonable barriers". Where third parties are providing claims handling services, insurers should ensure those third parties are aware of the FCA's expectations.
The FCA concludes the letter by making clear that it will be considering PII insurers' response to claims made by BSPS scheme firms through the lens of the forthcoming Consumer Duty, which requires firms to act to deliver good outcomes for retail consumers – and that, in the FCA's view, ensuring that PII policies respond appropriately is part of insurers' duty to help ensure that customers are compensated for any harm they may have suffered.
Impact on the wider PII market
During the consultation period, the FCA considered the wider market implications of the redress scheme, and the impact on the availability of cover for DB transfers in the market more widely. The FCA says that PII premiums have risen faster since 2018 for firms which provide DB transfer advice, which (in the FCA's view) suggests that the perceived risk of DB advice has been 'priced in' by insurers. The FCA has concluded that it is unlikely that the redress scheme will lead to "wider deterioration" in the PII market beyond BSPS firms, as "the necessary sequence of events to bring about contagion following a redress scheme is highly indirect". The FCA concludes that even in a scenario where premiums for advisers giving DB transfer advice rise further, the effect on prices for DB transfer advice will be mitigated under what it refers to as "plausible scenarios".
It is unclear what the FCA means by this or how those scenarios have been modelled. Given the misconceptions about the availability of PII cover which the FCA now concedes it made in the Initial Consultation Paper, the FCA's conclusions about the impact on the wider PII market should perhaps be taken with caution.
Furthermore, and in light of the FCA test case in relation to business interruption cover arising from the COVID pandemic, insurers will be scrutinising very carefully the suggestion by the FCA that it is prepared to 'go into bat' on behalf of firms against their PII providers where cover has been declined.