Consultation Paper on Professional Indemnity Insurance Fiduciary and Investment Sectors

Overview

Background

Professional indemnity insurance (“PII”)

PII “covers liability for injury, damage or financial loss arising from a breach of professional duty carried out in good faith or negligent acts, errors or omissions in their professional capacity. The persons covered by the policy include the insured, any employees/partners, any agent and any predecessors” (Chartered Insurance Institute).

PII indemnifies firms in the event that they provide poor advice or are negligent when looking after other’s assets. The cost of a claim combined with the legal expenses can be very large, often much greater than a firm’s net assets. PII ensures primarily that clients who have suffered loss will be compensated but also that the firm can continue to service other clients. Should the loss event itself cause such reputational damage to the firm that it cannot continue, insurance to cover the financial cost of the claim will allow for an orderly wind-down of the firm; subject to the claim being covered.

The protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons carrying on finance business is a statutory function of the Commission. One of the ways the Commission carries out this function is to impose a requirement on certain financial services businesses that they maintain PII. This is consistent with supervisory regimes in other jurisdictions.

Licensees must continue to meet the relevant statutory Minimum Criteria for Licensing, which among other things require that business is conducted in a prudent manner. A licensee shall not be regarded as conducting their business in a prudent manner unless it maintains an appropriate amount of insurance cover.  

PII does not prevent a negative event for clients but may limit their financial loss as a result of it. It is therefore important that firms have PII that is of sufficient value and coverage to protect their customers and themselves.

Background to Changes in the PII Marketplace

The provision of PII has gone through significant changes in recent years at a market, regional and sector-specific level. This is partly as a result of general hardening of the insurance market but there have been particular issues reported for the PII sector such as historic under-pricing, significant losses in certain sectors and a reduced tolerance of loss-making by insurers. The limited number of insurers offering cover for Guernsey firms together with a unique legal system; smaller firms generating lower premiums; and business models with different risks (relative to UK) have added to the challenges in the Bailiwick’s PII marketplace.

The current PII market conditions have impacted local Fiduciary and Investment licensees. Some firms reported that obtaining PII cover has become more difficult and premiums have also increased significantly. Some licensees struggled to obtain a PII policy with the level of cover required by the relevant rules. Further details on these are provided under the “Survey of firms” section below.

A review on PII

Towards the end of 2020 and the beginning of 2021, the Guernsey Financial Services Commission (the “Commission”) issued questionnaires regarding PII arrangements to be completed by Full Fiduciary Licensees[1], entities licensed under the Protection of Investors (Bailiwick of Guernsey) Law (“PoI licensees”) and Licensed Insurance Intermediaries. The surveys took place against a background of a hardening PII market.

The Commission has analysed data received from the completed questionnaires and consequently this Consultation Paper (“CP”) now seeks views from industry on proposed changes to the current PII requirements for the Fiduciary and Investment sectors. As noted above, the Commission has engaged with the Fiduciary and Investment sectors, and the Insurance sector. The issues surrounding price and availability are relevant for all sectors, but various factors differentiate Fiduciary and Investment businesses from the Insurance industry. These factors include the exposure to retail customers; the location of customers; the nature of advice given within each sector; the average size of the firms; and each industry’s claims experience. The Commission is therefore carrying out a separate consultation for the Fiduciary and Investment sectors. Where appropriate the Commission has adopted consistent approaches across all industry sectors. A separate CP making proposals in respect of PII for Insurance Intermediaries and Insurance Managers has also been published and is available on the Consultation Hub.

This CP presents key findings from the surveys and proposals concerning changes to be made to the existing rules. Proposals are driven by what is considered appropriate to a particular business model and where appropriate proposals have been aligned and are consistent between industry sectors as we are mindful some businesses hold more than one regulatory licence. All the proposed changes are summarised in the table in Appendix 2.

The Commission would like to thank the licensees which participated in the surveys for their cooperation.

What happens next

Feedback to this CP is welcomed and will be considered by the Commission with a view to issuing a revised draft of the Fiduciary Rules and Capital Adequacy Rules by H1, 2022. It is envisaged that, for practical reasons, new rules relating to PII as proposed above, if implemented, will not apply to existing PII policies, but will apply from the next renewal date.