Consultation Paper on Professional Indemnity Insurance Fiduciary and Investment Sectors (December 2021)

Summary

This is a Guernsey Financial Services Commission consultation paper (opened 8 December 2021, closed 14 February 2022) proposing changes to the Professional Indemnity Insurance (PII) requirements applicable to fiduciary licensees and licensees under the Protection of Investors (Bailiwick of Guernsey) Law (Pol licensees), including dual licensees holding both licences. The document also incorporates the Commission's Feedback Statement (issued 10 June 2022) summarising which proposals were adopted, amended or dropped following industry responses, and announces a further eight week consultation on final draft rule wording before formal adoption.

Key outcomes for Fiduciary licensees

Calculation basis: Minimum PII cover remains based on turnover from regulated fiduciary activity; licensees must separately consider whether their indemnity limit and scope of cover is adequate given possible claims from non-regulated activity.
Cap introduced: Minimum required cover is capped at the lower of three times fiduciary turnover or GBP 10 million (new Rule 4.1(2A) of the Fiduciary Rules).
Excess restriction removed: The 3% of turnover maximum excess cap is removed, on condition that additional financial resources equal to the excess amount continue to be held.
Legal defence costs: PII must cover legal defence costs, but the proposal that such costs sit outside (do not erode) the aggregate limit has been withdrawn.
Dual licensees: A new rule requires dual licensees to meet PII requirements under whichever regime sets the higher aggregate minimum indemnity limit; for dual Pol/Fiduciary licensees this will normally mean the Pol Capital Adequacy Rules take precedence.

Key outcomes for Pol licensees

Calculation basis changed: Minimum cover will be based on income from controlled investment activity and other regulated activity (replacing total revenue); licensees must assess adequacy of cover against possible non-regulated activity claims.
Cap introduced: Minimum required cover capped at the lower of three times total regulated income or GBP 10 million.
Net assets adjustment: The Capital Adequacy Rules definition of net assets will deduct an amount equal to the PII excess, which may require some licensees to hold higher capital; the existing 20% of total insured excess cap is removed.
Legal defence costs: Same treatment as Fiduciary licensees: cover required, but exclusion from the aggregate limit withdrawn.
PII notification duty: A new requirement obliges Pol licensees to notify the Commission when a notification is made to their PII insurer and when any payment is made by insurers under the policy.

None of these changes are yet formally in force: the Commission plans to issue a revised draft of the Fiduciary Rules and Capital Adequacy Rules incorporating the agreed changes, run a further eight week fatal flaw consultation on the final draft wording, and only then formally adopt the amendments. Once adopted, the new PII requirements are intended to apply from each licensee's next policy renewal date rather than to existing PII policies already in force.

Key obligations

Once adopted, Fiduciary licensees must ensure PII cover is based on turnover from regulated fiduciary activity, capped at the lower of three times turnover or GBP 10 million, and must separately assess whether the indemnity limit and scope is adequate for any non-regulated activity carried on.
Once adopted, Pol licensees must calculate minimum PII cover based on income from controlled investment activity and other regulated activity, capped at the lower of three times that income or GBP 10 million, and assess adequacy for non-regulated activity.
Dual licensees must comply with the PII requirements of whichever regulatory regime imposes the higher aggregate minimum indemnity limit, unless otherwise instructed by the Commission.
Pol licensees will be required to notify the Commission when a notification under a PII policy is made to their insurer and when any payment is made by insurers under the PII cover.
PII policies for both sectors must cover legal defence costs.
New PII rules, once formalised, are to apply from each licensee's next PII policy renewal date, not to policies already in force.

Applies to

Fiduciary licensees (including Primary Fiduciary Licensees), Protection of Investors (Pol) licensees, Dual licensees (licensed under both the Fiduciaries Law and the Protection of Investors Law), Licensed Insurance Intermediaries (addressed in a related separate consultation)

Deadlines

8 December 2021 to 14 February 2022: Original consultation period during which comments on the proposed PII rule changes were invited.
eight weeks from 10 June 2022: Final consultation period on the draft amended Rules wording to identify any fatal flaws before formal adoption.
next PII policy renewal date: New PII rules, once adopted, will apply from each licensee's next renewal date rather than to existing PII policies.