Securing continuity, measures taken in financial difficulty, write-down orders and paying compensation

Securing continuity of long-term insurance cover

16.

The PRA expects that the FSCS will first consider the merits of seeking to secure continuity of cover for claimants of long-term insurance contracts, subject to the FSCS being satisfied the criteria set out in Rule 4.1(1)–(4) of the Policyholder Protection Part are met, before taking such measures it considers appropriate under Chapter 5 of the Policyholder Protection Part, or any determination that compensation is payable under Chapter 18, of the Policyholder Protection Part.

Relevant person in financial difficulty

17.

The PRA expects the FSCS to take such measures it considers appropriate for the purposes of safeguarding the rights of eligible claims under protected long-term or general contracts of insurance when the insurer is in financial difficulties, subject to the FSCS being satisfied the criteria set out in Rule 5.1 of the Policyholder Protection Part are met.

Write-down orders

17a.

The PRA expects the FSCS to co-operate with the write-down manager (WDM) following the court sanctioning a write-down order under section 377A FSMA. This will require the FSCS to comply with Rule 5A.2 of the Policyholder Protection Part. In particular, the FSCS, in conjunction with the WDM, will need to:

  1. (a) enter into a valid and effective trust deed in respect of that account which meets the minimum requirements set out in Rule 5A.2(2) of the Policyholder Protection Part; and
  2. (b) open an account to which the FSCS can make pay top-up payments, and from which top-up payments can be made to eligible claimants prior to the FSCS making any top-up payments (Rule 5A.2(1)(c) of the Policyholder Protection Part). 

Claims on behalf of another person

18.

Rule 3.3 of the Policyholder Protection Part gives the FSCS the option to pay compensation (and any recovery or other amount payable by the FSCS to the claimant) to a person who makes a claim on behalf of another person, subject to the FSCS being satisfied the criteria in Rule 3.3(1)–(2) are met. The PRA expects Rule 3.3 of the Policyholder Protection Part may be applied, but not limited to, the following circumstances:

  1. (a) when a personal representative makes a claim on behalf of the deceased;
  2. (b) when trustees make a claim on behalf of beneficiaries (for further provisions relating to claims by trustees, see Rules 20.10 to 20.16 of the Policyholder Protection Part);
  3. (c) when the donee of an enduring power of attorney or a lasting power of attorney makes a claim on behalf of the donor of the power;
  4. (d) when the Court of Protection makes a claim on behalf of a person incapable by reason of mental disorder of managing and administering their property and affairs; and 
  5. (e) when a policyholder dies before receiving compensation.

Relevant persons in default

19.

The FSCS may determine a relevant person in default under Rule 10.2 of the Policyholder Protection Part. A relevant person is a person who was a participant firm at the time the act or omission giving rise to the claim against it took place. As such, the PRA expects an insurer to be authorised for the purposes of FSMA and the Policyholder Protection Part, at the time the insured event that gave rise to the claim occurred or is notified to the insurer. The PRA expects that the insured event is the earliest date on which the act or omission giving rise to the claim against an insurer might occur.

Successors in default

20.

The FSCS may also determine a successor to be in default under Rule 11.3 of the Policyholder Protection Part. A successor is a person who has assumed responsibility for liabilities arising from acts or omissions of a relevant person. All claims that arise (whether reported or unreported) against the predecessor relevant person before the assumption of liabilities by a successor (ie in circumstances where the insured event occurred before the transfer) fall under the successor rules. All claims that arise (whether reported or unreported) after the assumption of liabilities by a successor (ie the insured event occurred after the transfer), will not be covered by the successor rules. However, if the successor is a relevant person in its own right, the claim will fall under the relevant person rules.

Members in default and the Central Fund of the Society

21.

The PRA expects that if a member (or where applicable, a member that is a successor) is unable to meet protected claims against it in full, then, in the first instance, any shortfall will be met by payments made by the Society from the assets of the Central Fund. The FSCS will not consider claims for compensation unless it is satisfied that the amounts which the Society will make available from the Central Fund are, or are likely to be, insufficient to ensure that claims against the member (or where applicable, a member that is a successor) under a protected contract of insurance will be met to the level of protection which would otherwise be available under the Policyholder Protection Part. The amount which the FSCS may pay in respect of any such claim, will be limited to the difference between the amount which the claimant will receive or is expected to receive, from the member and the Society together and the maximum amount of compensation payable in accordance with Chapters 17 and 19 of the Policyholder Protection Part.

Assignment and subrogation

22.

The PRA expectation is that upon the payment of compensation, the FSCS will determine that any such payment has the effect of either automatically subrogating the FSCS to the claimant’s rights against a relevant person (or where applicable, a successor) and/or any third party; or, has the effect of automatically assigning the FSCS to the claimant’s rights against a relevant person (or where applicable, a successor) and/or any third party. The FSCS will determine the most appropriate method to use in the specific circumstances. The PRA also expects that the FSCS may (and in some cases must) make an offer of compensation conditional on the assignment or subrogation of rights to it by a claimant.

Recoveries

23.

Under Rule 19.5 of the Policyholder Protection Part, the PRA expects the FSCS to take into account any payments made to the claimant by the relevant person (or where applicable, the successor), the FSCS (including amounts recovered by the FSCS on behalf of the claimant) or by any other person, to ensure that the claimant does not suffer any disadvantage arising from their prompt acceptance of the FSCS’s offer of compensation compared with what might have been the position had they delayed their acceptance.

24.

The PRA expects the FSCS to pay recoveries to claimants in cases where the FSCS has been subrogated or has taken assignment (automatic, electronic or otherwise) or transfers of rights from claimants and makes payments of compensation, but then makes recoveries from the relevant person (or where applicable, the successor) or any third party that are greater than the amount paid to claimants. The PRA does not expect the FSCS to pay recoveries unless there has been a payment of compensation under Chapter 18 of the Policyholder Protection Part.

24a.

In the event of a write down (see paragraph 17a above), the FSCS has a right of recovery from the insurer under Rule 5A.5 of the Policyholder Protection Part. The PRA expects the FSCS to exercise that right in the circumstances described in Rule 5A.5 of the Policyholder Protection Part but any interest claimed by FSCS will be limited to the statutory rate of interest unless otherwise agreed with the PRA (and the WDM).

Paying claimants

25.

The PRA expects that the FSCS will usually pay compensation direct to the policyholder, but in certain circumstances it may be appropriate for the FSCS to pay compensation to someone other than the policyholder. Rule 3.3 and Chapter 18 of the Policyholder Protection Part sets out when those circumstances arise.

Reduced or interim payments

26.

Rule 18.4 of the Policyholder Protection Part applies to compensation payable in connection with any protected claim. The PRA would expect this to apply, for example, to a situation where the FSCS considers it imprudent to make a payment in full because of uncertainty as to the value a court might attribute to a bonus provided for under a long-term insurance contract. In such circumstances, the FSCS may make payment of compensation on account to the policyholder in respect of those benefits under the contract of which the value is certain.

27.

Factors the PRA expects the FSCS to take into account when considering taking the approach in Rules 18.8(1) and 18.8(2) of the Policyholder Protection Part include:

  1. (a) whether the amount of claimants’ overall claims are likely to be assessed within a reasonable time frame;
  2. (b) the circumstances of the claimants;
  3. (c) the circumstances of the claims; and
  4. (d) the nature of the products to which the claims relate.