Financial redress awarded by the FCA can cost millions: will a Professional Indemnity Policy respond? (Update)

Statutory powers of the FCA

The FCA has statutory power under the Financial Services and Markets Act 2000 to order regulated entities to pay redress in the following two ways:

• Under s.55L the FCA may impose a single redress scheme on one particular entity.
• A s.404 consumer redress scheme may be put in place where there is considered to be widespread or regular failures by multiple firms.

Will such a redress scheme equate to a legal liability to which an Insured’s professional indemnity policy should respond?

What is the potential impact in failing to notify a circumstance at an early stage?

Learnings from three high profile redress schemes imposed by the FCA...

Redress under s.404 of the Financial Services and Markets Act 2000

A s.404 scheme was not in issue in BlueCrest, partly as it related to a single firm rather than a widespread failing by multiple firms.  However, two s.404 redress schemes ordered by the FCA provide useful background to the FCA’s approach, potential PI coverage, and the difficulties if matters are not notified at an early stage.

Notably, a s.404 scheme can only be imposed if certain conditions, listed in the relevant sections of FSMA, are met, including that “it appears to the [FCA] that there may have been a widespread or regular failure by relevant firms to comply with requirements applicable to the carrying on by them of any activity; [and] it appears to [the FCA] that, as a result, consumers have suffered (or may suffer) loss or damage in respect of which, if they brought legal proceedings, a remedy or relief would be available in the proceedings;” [Financial Services and Markets Act 2000 s.404]

Lessons learned: the importance of circumstance notification

In both Arch Cru and BSPS, independent financial advisors (IFAs) saw insurance coverage for potential claims removed from policies at renewals, either actually by exclusions, or practically by higher excesses, once insurers became aware of the widespread issues. 

Circumstance notification is a policy mechanism that allows matters to be notified that may, but have not yet, given rise to a claim – with insurers then required to accept future claims arising out of that notification in the policy year to which the circumstance was notified. 

Both matters, therefore, demonstrate the importance of broad notifications of circumstances when an issue first arises (whether specifically at a firm, or generally in an industry) to ensure that, as far as possible, all future claims, are caught by the original notification of circumstances and thereby to avoid the impact of any exclusions and significant deductibles that may follow on renewal.

Key take aways

Individual policy terms and specifics of each individual claim will vary.  Your broker can guide you on the appropriate approach for your situation and the coverage available.  Voluntary redress schemes may also raise different issues to the mandated schemes discussed in this article.  The schemes discussed demonstrate the wide powers of the FCA, the potential coverage available, and the importance (and value) of circumstance notification in the event of a widespread mis-selling or mis-advising issue, whether at an individual firm or across the industry.

References

1. Financial Conduct Authority v BlueCrest Capital Management (UK) LLP 2024 foot note
2. Decision Notice of the FCA 4 November 2021
3. Financial Services and Markets Act 2000 s.404