Unanswered questions

The Independent Financial Advisers Association and mutual insurance broker LIBM applied for a judicial review of last years' October statement by the Securities and Investments Board (SIB) on its review of pensions selling. DJ Freeman acted on behalf of the IFAA and LIBM and judgment was given on 12 May after a six-day hearing.

There are some important aspects of the judgment which have not been fully highlighted.

Excess of power

The first ground of challenge to the statement was that the SIB had no power to issue it. The court dismissed this, but on a narrow basis. The question addressed by the court was: had the SIB purported to exercise powers that in fact it did not possess?

The judges found the SIB only had statutory powers under the Financial Services Act 1986. These included the power to give guidance to SROs (self regulatory organisations) and RPBs, (recognised professional bodies) but did not include the power to impose any sanction on an authorised investment firm unless directly regulated by the SIB. The statement may have given the impression of commanding regulators to impose sanctions on members. However, the court decided this was not its true effect and that the SIB had not acted in excess of its power.

There was no decision whether the review fell outside the scheme of the Financial Services Act and, therefore, ultra vires the SIB. The applicants argued strongly that the framework of the Act was contrary to the SIB scheme of enforced compensation in the absence of complaint. The Gower Report and White Paper giving rise to the Act made it clear this was not intended.


The applicants' second ground for challenge was that the statement was so unreasonable there was no power to make it. The court decided the statement could be challenged as wholly irrational to the extent that its requirements invalidated investment firms' professional indemnity insurance.

The judgment referred to the following terms included in the PIA's model policy: that notice of any claim received shall be given to the insurers as soon as practicable; the insurers shall be entitled to take over and conduct the investigation, defence or settlement of the claim; the insured shall not admit liability, or make any offer, promise or payment without the insurers' consent; and the insured shall give all such assistance as the insurers shall reasonably require.

The court considered it was arguable that there would be breaches of the policy conditions and gave the following examples: if notice of the claim were given, and insurers wished to take over the defence with the assistance of the insured, it was questionable whether the insured could properly refuse assistance, and entrust the papers to the Pensions Unit. The insured was funding the Pensions Unit; if the time came for the insured to admit liability, and the insurers refused to consent, it was questionable whether the insured could properly tell the Pensions Unit (which they were still funding) so it could encourage the investor to proceed

The judgment referred to a paper for the SIB board dated 20 July 1994 doubting that the scheme might be legally effective to maintain cover. The judges suggested the possibility of a declaration dealing with the position. This led the SIB to undertake: “To inform every SRO, every RPB and every body directly regulated by the SIB that nothing in the SIB's statement is to be read as requiring any firm to take any step which will invalidate its insurance cover without its insurers' consent.”

Who assesses whether PI cover is invalidated? After judgment, the SIB's counsel submitted that the SIB statement did not need altering because it made clear the

review procedure was not intended to invalidate professional indemnity cover. The test was whether the SIB had required anything to be done which would have the effect of invalidating cover.

Investment firms are, therefore, only to take steps which will not invalidate their PI cover at law. If necessary, this is to be judged by the courts and not by the regulators. Investment firms will need to contact their insurers before taking steps under the review, and possibly take legal advice.

Helen Pallot is a financial services partner at DJ Freeman.