Financial services companies will no longer be able to insure against FSA fines as the use of such p...
Financial services companies will no longer be able to insure against FSA fines as the use of such policies is being banned by the FSA by the end of the year.
However, FSA officials admit they are not actually sure which types of companies - such as insurers, investment firms or IFAs - use these insurance plans because they have never encountered a company being fined which holds such protection.
News just out from the FSA is unlikely to particularly affect IFAs, suggests the Association of IFAs, because there are very few advisers holding additional insurance cover to protect themselves from the financial burden of FSA fines.
Despite not knowing the type of firms - or which firms - hold fine protection insurance, the FSA believes take-up is thought to be increasing.
Issued today, CP191 - containing proposals for miscellaneous amendments to the FSA Handbook - says there are plans to ban the use of such policies by January 1, 2004.
Any policies taken out before December 31st will still be valid to that date, however, anyone who, from January 2004 onwards, takes out a new policy, renews, or subsequently makes a claim against the actual FSA fine will be in breach of FSA rules.
This does not prevent firms from holding indemnity insurance against all or part of the cost of defending FSA enforcement action, stresses the FSA.
The FSA says changes are designed to make companies more aware of their regulatory requirements because "availability of insurance against FSA fines reduces the impact of any financial penalty and that, in turn, reduces the incentive to comply with FSMA and the Handbook".
Tracey Mullins, communications director at the AIFA, says the trade body is unhappy with the FSA's actions - regardless of whether many IFAs use such insurance or not - because it does not feel the FSA should get involved in commercial activities, and, indeed, whether banning this cover really makes a difference to regulatory practices.
"We doubt whether this would have the impact the FSA says it does because if a firm has received even one or more fines, they are likely to become uninsurable anyway, and with a fine comes public profile," says Mullins.
"It may be that firms feel they need to protect themselves against future developments - for example IFAs did not know there would be a pensions review. When they were fined, they were forced to start the review work all over again, so some sort of insurance is not really going to protect them. But companies cannot foresee what review is coming next so there might be some larger IFA firms who have regulatory insurance.
Even though most small IFAs are unlikely to be able to afford additional insurance premiums for regulatory fines cover, Mullins suggests the FSA has only higlighted such insurance further by publicly announcing a pending ban.
It is unclear at this stage, as a result, whether enforcing a fine on a company could then have serious implications for a financial services company's compliance with the Insurance Mediation Directive, or whether the cost of fines might have to be sought through extra costs to clients.
A spokeswoman for the FSA says the regulatory body would not issue fines against a fine that could make them insolvent or bankrupt.
Consultaton on CP191 will continue until September 24th, before enforcement begins on January 1st 2004.
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