By Nicholas Ellor, Senior Underwriter.
Insurance distribution activities cover a number of undertakings such as “advising on” and “arranging deals” in contracts of insurance; therefore embracing litigation/after-the-event insurance. These activities used to be called “insurance mediation activities”, however, the Insurance Mediation Directive has been repealed and replaced by the Insurance Distribution Directive (IDD).
The regulatory regime
Solicitors as potential insurance “distributors” are affected by IDD that was adopted into UK national legislation on 1 October 2018.
At the risk of stating the obvious, litigation/after-the-event insurance is a contract of insurance, which in turn is a “specified investment” for the purposes of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
Solicitors conducting litigation will typically advise on and/or arrange after-the-event insurance – which is a “regulated activity” for the purposes of The Financial Services and Markets Act 2000 (FSMA).
Only persons who are authorised or exempt under the FSMA can carry out “regulated activities” by way of business.
Solicitors are in the business of providing professional legal services – advising clients on litigation/after-the-event-insurance contracts is an ancillary activity.
Section 327 of FSMA exempts members of designated professional bodies (such as the Law Society) from the requirement for authorisation to conduct regulated activities (including insurance distribution activities) if certain conditions are met (principally that the regulated activity is incidental to the provision of professional advice services).
The Solicitors Regulation Authority (“SRA”) regulates solicitors in England and Wales and is a “designated professional body”. Solicitor firms regulated by the SRA can therefore carry on insurance distribution activities, subject to the firm’s compliance with SRA regulations and rules set out in the SRA Financial Services (Scope) Rules 2001 (Scope rules) and the SRA Financial Services (Conduct of Business) Rules 2001 (COB rules).
All professional firms that carry on insurance distribution activities must be shown on the Financial Conduct Authority’s exempt professional firms (EPF) register.
Solicitors who are registered with the Financial Conduct Authority (“FCA”) as an exempt professional firm are, in the SRA’s view of the IDD, an ancillary insurance intermediary (i.e. its principal activity is not insurance distribution and is complementary to the main legal professional services it provides).
So, in summary, solicitor firms which carry on insurance distribution activities are exempt from being regulated by the FCA in respect of those activities, instead they are regulated by the SRA.
Solicitors advising clients on litigation insurance
What can a solicitor do when a client enquires about litigation insurance?
A solicitor cannot reasonably be expected to be an expert in the field of legal expenses insurance and be familiar with the various products available in the market and likely premium costs.
The solicitor of course has to advise the client as to the availability of this type of insurance (as not to do so could leave him or her open to a potential claim for negligence – SRA Code of Conduct 1.2 outcome and indicative behaviours 1.13 and 1.16 relate).
The solicitor could submit an application form to a broker specialising in this kind of insurance on behalf of the client and effectively delegate that task on behalf of the client to the broker.
Alternatively, the client could decide to make his or her own investigations and chose a particular provider.
There is a third option, the solicitor can quite legitimately recommend a particular insurance provider with whom it is familiar and has a good working relationship with. This will more often than not be the case where the solicitor firm has carried out its own due diligence on the insurer, met its principal underwriters and can personally vouch for the professionalism of its staff and the quality of its product (in terms of responding to any claims made on the policy and the speed and efficiency with which this has been done).
Subject to it being in the best interests of the client and not compromising the independence of the solicitor, there is no reason why a firm of solicitors cannot have and indeed promote a preferred insurance provider for its clients who wish to apply for legal expenses insurance (SRA Code of Conduct 6.1 outcome).
Temple Legal Protection specifically does not offer any commission or pay any referral fee to solicitors that recommend its product and services to clients. To do so would lay firms open to potential accusations of bias and lack of independence.
Instead Temple relies on the quality of its product and the services provided by its in-house underwriters and support personnel to recommend itself. This clearly demonstrates to the client that the solicitor has no financial incentive in promoting Temple’s product and that it does so because it has satisfied itself as to the quality of Temple’s product, reputation in the market and track record.
A number of solicitors specifically market Temple’s product on their websites and is viewed by them both as a benefit for the firm and its potential clients.
Specific rules relating to information to be provided to the client
Under Rule 9 of the SRA Financial Services (Conduct of Business) Rules 2001, where a firm undertakes insurance distribution activities for a client it has to comply with certain rules set out in appendix 1 to those rules. These include the provision by the firm to the client (prior to entering into any contract of insurance with Temple Legal Protection) of a “demands and needs” statement. This is to ensure the contract of insurance proposed to be entered into is appropriate to the risks the client wishes to insure against.
Temple believes its contract of insurance best meets the demands and needs of the client because:
- the insurer, Royal & Sun Alliance Insurance plc which backs the policy, is UK-based with an “A” rated credit rating;
- Temple is known to provide an excellent claims service;
- The Financial Services Compensation Scheme will apply should the insurer be unable to meet its liabilities (only applicable to consumers and businesses with an annual turnover of less than £1m);
- it has significant experience of insuring a wide range of litigation;
- the premiums are considered to be fair in that they reflect the category of risk;
- the premium is payable at the end of the case;
- the premium is self-insured and therefore does not need not be paid by the client if the claim is unsuccessful;
- the cover provided is considered to be comprehensive.
The law firm must also provide the client with an “insurance product information document” listing the product’s benefits, terms and key exclusions.
In summary, solicitors can quite properly personally recommend a particular insurance provider. If they advise clients on or assist clients in arranging litigation/after-the-event insurance, they will be conducting insurance distribution activities. These activities are ancillary to their main activity of providing professional legal services. Nevertheless, these activities are regulated and can only be carried out if:
1. the firm is registered in the Financial Services Register as an Exempt Professional Firm;
2. it complies with Rule 5.6 of SRA Financial Services (Scope) Rules 2001 and with Appendix 1 of the SRA Financial Services (Conduct of Business) Rules 2001
If you have any further questions about litigation insurance and the Insurance Distribution Directive, please call our commercial team on 01483 577877 or send an email to firstname.lastname@example.org