The regulator is looking to prohibit firms from using insurance to pay for regualtory fines
The FSA is proposing banning firms from using insurance to cover the cost of paying regulatory fines imposed for misconduct.
In Consultation Paper 191, published on 24 July, the regulator outlined amendments prohibiting every authorised firm and all members of Lloyd's from entering into any contract that would pay all or part of an FSA imposed financial penalty from 1 January 2004.
Any such contract taken out on or before 24 July this year would remain valid. The FSA said this is necessary to protect people's rights under existing contracts and avoid creating a motivation to enter into new insurance agreements before the rules come into force.
The paper states that anyone entering into contracts that include cover for payment of FSA fines between 25 July and 31 December 2003 does so at their own risk.
Under the proposals, holders of such insurance contracts have until 31 December to alter agreements to exclude provision that covers FSA fines. If a firm enters into such a contract between now and the end of the year, it will not be a breach of the rule until that date.
The regulator said this type of insurance cover reduces the incentive for compliance with FSA rules.
Carol Sergeant, managing director responsible for enforcement at the FSA, said: 'Our proposals are designed to plug a potential hole. Insurance to pay FSA fines not only reduces the impact of those fines but also lessens the incentive for firms and individuals to meet appropriate standards. We cannot allow such developments to go ahead unchecked.'
FSA spokesperson Karin Loudon said she is not actually aware of any firm or individual who has so far used such a policy to cover a misconduct fine.
'The proposal is a pre-emptive move as the market for this type of policy is small but growing,' she added. 'However, we do know this type of cover is being bought by firms.'
Dick Saunders, chief executive at the IMA said he is not totally clear why the FSA is focusing on this issue as he is not aware of any IMA members who have taken out an insurance policy to cover this type of claim.
Tracey Mullins, director of public affairs at Aifa, added: 'I am not sure how many IFAs would have this type of cover but if they do, it is likely to be the larger firms.
'I am doubtful it will have any impact. It is strange because if a firm is fined by the FSA, it is usually because of something pretty dreadful. The impact is not just monetary, there is also the naming and shaming element that comes along with the fine.'
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