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FSCS chief: IFAs must buy more expensive PI to stop lifeboat claims

Mark Neale says FSCS is a first resort because PI policies have not always been effective

Financial Services Compensation Scheme (FSCS) chief executive Mark Neale has conceded the lifeboat is now an ‘insurer of first resort’ for many businesses whose professional indemnity (PI) policy cannot cover liabilities.

Many PI insurers now list advice on the British Steel Pension Scheme (BSPS) as a no-go area, joining infamous investment schemes such as Arch Cru and Keydata. It is inevitable another busy period for the FSCS is coming.

The causes of high FSCS bills do not often lie with the scheme itself. But the FSCS has recently courted controversy with its decision to award a £37 million claim-handling contract to Capita.

The same firm was the authorised corporate director for the now-liquidated Connaught fund, as well as Arch Cru.

Read on to hear Neale’s thoughts on these issues.

Financial Services Compensation Scheme (FSCS) chief executive Mark Neale has conceded the lifeboat is now an ‘insurer of first resort’ for many businesses whose professional indemnity (PI) policy cannot cover liabilities.

Many PI insurers now list advice on the British Steel Pension Scheme (BSPS) as a no-go area, joining infamous investment schemes such as Arch Cru and Keydata. It is inevitable another busy period for the FSCS is coming.

The causes of high FSCS bills do not often lie with the scheme itself. But the FSCS has recently courted controversy with its decision to award a £37 million claim-handling contract to Capita.

The same firm was the authorised corporate director for the now-liquidated Connaught fund, as well as Arch Cru.

Read on to hear Neale’s thoughts on these issues.

What is the latest on BSPS claims?

We have had claims in and we are aiming to turn them around as quickly as we can. BSPS members affected by this deserve the best possible service. (The FSCS has received 29 claims relating to Active Wealth (UK) Ltd).

Claims arising from defined benefit (DB) transfers are only part of the story, a comparatively new part of the story. But the bulk of the claims we have received on the pensions front have not come from the trading in of DB rights. They have come from advice to move out of occupational pension schemes and into Sipps to hold risky assets.

We have seen the revised guidance the Financial Conduct Authority (FCA) has issued. It said the presumption should be against advising people to trade in their DB rights, and that is absolutely the right advice.

You would hope that would have a dampening effect on this particular kind of misadvice and the claims that arise from it.

One firm involved in British Steel advice pulled out of the market because of increased activity from claims management firms. How will the influx of claims firms affect the FSCS?

Certainly in the case of the BSPS workers, we were very proactive from day one in contacting groups representing them. We wanted to make sure those people who had received this bad advice were aware of the service we provide and that it is free.

What would you say to IFAs who have never advised on DB transfers and are seeing their levies increasing as a result of them?

We published some research this year that shows people who are aware of FSCS protection have a greater propensity to seek independent financial advice. That is why the costs of compensation are shared across the profession.

The FCA recently completed a thorough review and published a set of proposals that we support. The one area in which the FCA is going to do some more work is risk-based levies, and that is absolutely right.

Firms running higher risks should pay a higher levy to reflect that, provided we can find a sensible, pragmatic way of doing it.

PI insurers are now excluding British Steel altogether and limiting cover on DB transfers. Why is the PI market not working?

In the recent past, we have become more of a first resort than a last resort, because PI policies have not always been very effective.

We then have a secondary interest in ensuring PI policies are capable of being called on by the FSCS itself when a firm fails and we are the major creditor of the estate.

[The exclusions] clearly limit the capacity of PI insurance to absorb some of the liabilities and claims that may arise and make it more likely the FSCS will be called on.

There is a trade-off between the robustness of PI insurance and the triggering of the FSCS. The more you ‘beef up’ PI policies, the more expensive they become for the profession up front. But they are more likely to absorb claims that would otherwise fall on the FSCS.

The less robust the policies, the cheaper they are, but the more likely the FSCS is to substitute for PI policies. There is no easy answer to that question. You cannot get away from that trade-off.

The Association of Member-Directed Pension Schemes (AMPS) is concerned the FSCS paying out on three collapsed Sipp firms will increase the risk of more Sipp operators collapsing amid a wave of fresh claims. What conversations have you had?

I have had a very good dialogue with Amps and explained our actions to them in reaching views on Montpelier Pension Administration Services, Stadia Trustees and Brooklands Trustees. There was no sense in which the FSCS was taking a novel view about the obligations of Sipp providers.

We were simply applying our normal civil liability test, and looking at whether those three Sipp providers had performed the due diligence we would expect Sipp providers to have done. In those cases, we made careful consideration and sought external legal advice.

Ultimately we judged there were quite significant due diligence failings that meant there was a liability on the part of those failed companies to the claimants concerned. It is not a case of the FSCS trying to draw a new line about where the obligations of Sipp providers should lie.

Why did Capita get the FSCS claims-handling contract?

We have adopted a model of outsourcing the majority of claims. That is absolutely the right model because we have a very unpredictable and volatile workload.

It would be very inefficient for us to hire and fire people as volumes of claims fluctuate.

Capita has been one of our partners for some time, so it has a great deal of experience working with the FSCS and vice versa.

We decided to move to a single partner rather than the three we have at the moment. It will enable us to achieve economies of scale, and offer a more efficient and easier service for customers.

We received 13 tenders in response to the initial invitation. It was a competition that went through a number of different stages and Capita won on merit.

This was on the basis of what Capita, compared with other providers, was able to tell us about its approach. This relates to handling claims, the kinds of investment it would make in the process, and its ability to work with us and adopt our cultural focus on customer service.

MARK NEALE CV

2010–present: Financial Services Compensation Scheme, chief executive

2005–2010: HM Treasury, director general responsible for budget, tax and welfare

2003–2005: Home Office, director general for security

2001–2003: Department for work and pensions, director for children and housing

Outside the box

If you were not doing this job, what would you be doing?

Before I joined the FSCS I was a civil servant. So I would probably still be somewhere in the civil service, implementing the government’s policies.

Pet peeve

Folk who walk around the streets reading the screen on their smartphones and not looking where they are going.

Book recommendation

The Locomotive of War by Peter Clarke. It is about the assumptions that liberals in both the UK and the US in the 20th century brought to issues of war and peace. I read it recently and thought it was fantastic.

What is the strangest thing to happen to you at work?

During my days in the Home Office I got to watch [former French president] Nicolas Sarkozy chair a meeting of the G5 interior ministers. That was an education in multi-tasking.

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