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FCA warns financial advisers over inadequate financial resources and PII cover

Jan 31, 2020 12:00:00 AM

What happened?

A Dear CEO letter published on 21 January argues that, by their failure to hold adequate financial resources or PII cover to compensate consumers, firms are effectively transferring the burden to other firms via the Financial Services Compensation Scheme levy.

The FCA says it has identified a number of problems with financial advisers’ PII cover. These include:

    • Cover exclusions for activities such as advising on defined benefit pension transfers,
    • Sub-limits for some activities that fall below the minimum cover requirement of €85m for IDD firms, and
    • Excesses on claims ‘at such a level as to render the cover materially ineffective.’

Noting that such inadequacies in PII cover amount to a failure to comply with its rules, the FCA says focusing on whether financial advisers hold adequate financial resources and PII will now form part of its ongoing supervisory work.

What do you need to do?

The FCA has stressed that financial advisers must meet its financial resources requirements as set out in Chapter 13 of its Interim Prudential Sourcebook: Investment Business, and elsewhere in its Handbook.

Ensuring that you hold adequate financial resources and PII cover is an important part of this. You should review your capital provisions and check the small print of your insurance policy documents to ensure there’s nothing that could be seen as compromising your ability to compensate customers in line with FCA requirements.

In particular, you should verify whether any applicable sub-limits or excesses could present difficulties. You could potentially consider holding additional capital to reflect such limitations. If you’re unable to purchase cover without exclusions for certain types of activity (e.g. DB transfers or pensions opt-outs), you should clearly not be providing such advice. It’s also important to purchase a PII policy that includes retrospective cover for advice provided prior to your firm’s ceasing to trade.

How can we help you?

Our expert team is on hand to provide further information, guidance or assistance on any aspect of the FCA’s capital adequacy rules and how to ensure your financial resources and PII arrangements are fully compliant. To find out more, email info@thistleinitiatives.co.uk or call 0207 436 0630.