The Pension Switching Review: Walking A Tightrope With Professional Indemnity Insurance Cover

Most professional indemnity (PI) insurance policies contain a

'condition precedent' clause prohibiting policyholders from

admitting liability or making any offer in respect of any claim or

possible claim. That condition does not sit happily with certain

regulatory obligations upon IFAs, which arise under the Financial

Services Authority's review of pension switching business (the

"Review"). This article seeks to provide some helpful

tips for avoiding the many insurance pitfalls that could lead to

pension switching claims not being covered and explores, too, the

possible impact of the Review on the PI market.

Key Features Of The Pension Switching Review

On 5 December 2008 the FSA published its report "Quality of

advice on pension switching: a report on the findings of a thematic

review", which set out the results of its assessment of advice

given to customers since 6 April 2006 to switch their existing

pension arrangement(s) into a personal pension plan (PPP) or

self-invested personal pension (SIPP).

The FSA immediately followed that up with a "Dear

Proprietor/Compliance Officer" letter on 9 December 2008, in

which it asked firms to assess the advice given to customers to

switch their pension(s). In its letter, the FSA stated what action

it expected firms to take and, from a PI insurance perspective, the

two most important "expectations" were:

to consider the approach taken to the firm's relevant

pension switching business and if necessary, look at a sample of

individual files of past sales as well as the sales process, and

systems and controls that apply; and

to take appropriate remedial action if failings are identified,

including providing redress to customers where necessary.

The FSA has stated that it intends to undertake follow-up work

in the third quarter of this year and has made clear that if firms

have not undertaken appropriate action in response to the Review,

they may be subject to regulatory action. Those are the important

regulatory obligations, but what about the obligations upon firms

under the terms of their PI insurance?

Key Features Of Your Professional Indemnity Insurance

The vast majority of insurers offer cover for IFAs on a

"claims made" basis. For these types of policies,

provided the insurance does not exclude claims that arise from

advice given before a particular date (sometimes called a

"retroactive date"), it does not matter when the advice

was given - underwriters will indemnify the policyholder against

claims made and notified during the policy year, subject to the

firm having complied with all the other terms and conditions of the

policy.

Although all policies are different, "claims made"

policies usually contain terms and conditions of the following

sort:

The policyholder must not admit liability or make any offer

deal or payment without the prior written approval of

underwriters;

Once a claim is made or the policyholder becomes aware (or

ought...