Fee protection insurance

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members understand the options available to a firm wishing to provide access to fee protection insurance.

Members may also wish to refer to the following related helpsheet and guidance:

• ICAEW Code of Ethics
• Designated Professional Body (Investment Business) Handbook
• GDPR – Lawful basis for processing

Fee protection insurance as the name implies, is an insurance product to cover the firm’s fees for handling HMRC investigations into clients’ affairs.

Such insurance doesn’t usually cover specific questions HMRC may make about a tax return (aspect enquiries) that can be answered from the firm’s files. The investigations usually covered by fee protection insurance are those detailed and more complex investigations. As they can be time-consuming and costly, it is usually in the interest of the firm and the client that they are dealt with as quickly and efficiently as possible.

Fee protection insurance is a way of providing for these unexpected costs that does not jeopardise the cash flows of the client. In addition, many insurers provide technical and legal support for the accountant.

However, the firm must consider whether it is providing insurance distribution services such as advising clients on insurance products, providing insurance products to clients, introducing clients to an insurer or insurance broker for advice on insurance products and assisting in the administration and performance of a contract of insurance (dealing with claims).

In order to provide insurance distribution services a firm needs to obtain Financial Conduct Authority (FCA) authorisation or a Designated Professional Body (DPB) licence from ICAEW and ensure their Professional Indemnity Insurance (PII) cover for this activity is equivalent to €1,250,000 per claim and €1,850,000 in total.

Further details can found in note 3 to Part 2 of the DPB (Investment Business) Handbook and regulation 3.4 of the Professional Indemnity Insurance Regulations and Guidance. Additionally the firm will also be subject to Part 4 of the DPB (Investment Business) Handbook which includes specific requirements relating to insurance distribution services (see Note – Insurance distribution activity below).

Whether or not a firm provides access to fee protection for its clients is a commercial decision. There is no compulsion on a firm to provide such insurance although some would say neglecting to mention its existence could result in some client dissatisfaction. The options therefore are:

1. Pay-as-you-go (without any insurance being provided).
2. An all-inclusive fee (covering the costs of possible aspect enquiries only).
3. Firm’s own insurance (with an insurance policy).
4. Generic advice about using a broker/insurer.
5. Alert client to the existence of insurance.
6. Arrange insurance for the client.
7. Recommend an insurance product for the client.

It is not possible for the firm to agree to cover the cost of any investigation into the client, starting within a specified time frame, for an additional flat fee or as part of an all-inclusive fee. This is effectively writing an insurance contract which can only be undertaken by a FCA authorised insurance company.

Just how far a firm can go in choosing which of these options to follow, will depend upon the nature of the arrangement and whether the firm is FCA authorised or DPB licenced. It is up to the firm to ensure it has the appropriate authorisation before it embarks on its chosen cause of action. The following table sets out what authorisation, if any, each of the options require.

One word of warning: Where insurance has been taken out by the client directly then there may be a temptation for the firm to deal with the insurance company on behalf of the client since it is the firm’s fees that are being settled by the insurance company. This is however a regulated activity as the firm will become involved in insurance distribution and claims handling. The firm cannot do this without a DPB licence or FCA authorisation.

Note - Firm’s own insurance (option 3 only)

For an arrangement not to be construed as an insurance contract with the client(s) the following should also be considered:

a) the contract (or engagement letter) between the firm and the client must require:

• the firm, at its discretion, to carry out work if an investigation occurs;
• the client to be liable for the firm’s fees, whether or not an insurance claim succeeds;
• the firm to make the insurance claim and credit any proceeds against the client’s liability for fees;
• the client to pay the fees if (and to the extent that) they are not covered by the proceeds of the insurance claim.

b) the firm agrees with the insurance company that only the firm has an insurable interest under the insurance contract.

c) the nature of the agreement is clear to the client, e.g. in promotional material. It would be advisable to use wording such as:
‘We can provide a service to assist you with tax investigations. To provide you with extra security, the firm is insured in respect of the charges for such work.’

By retaining discretion in its arrangements with the client, as noted above, the firm may not have an insurable interest in the contract with the insurer, which is a key feature of an insurance contract. Therefore, in considering the arrangements, the firm and the insurer need to be satisfied the specific arrangements only constitute such a contract between the firm and the insurer and do not constitute an insurance contract between the firm (or the insurer) and the firm’s clients. In reaching their conclusions, each particular arrangement needs to be looked at on its own specific facts, and the firm and the insurer should make this assessment with regard to the FCA’s guidance on what constitutes an insurance contract which is contained the Perimeter Guidance Manual (PERG 5.3 and PERG 6).

When taking out such insurance cover it is essential to check:

• The policy provides adequately for appropriate risks that the client and firm may face.
• Any exclusions are unlikely to reduce the availability of cover by a significant amount.
• Any limitation on the extent of a claim is unlikely to affect adversely any investigation.
• The claim handling procedures of the insurer will not be particularly onerous.
• The insurance is cost effective.
• That, if desired, the firm will be the ‘provider’ of advice in the event of an investigation (some insurers reserve the right to appoint tax practitioners of their choice).

Note – Insurance distribution activity (options 6 and 7 only)

As the firm is arranging the insurance it must provide the client with a demands and needs statement. Detailed information and sample wording is available in Schedule 2 to Part 4 of the DPB (Investment Business) Handbook.

In addition the firm is involved in ‘cross selling’ under the Insurance Distribution Directive. The insurance is ancillary to the taxation services and so the client must be given an opportunity to purchase the taxation services without the associated insurance. The firm is required to disclose its status as an ancillary insurance intermediary as per paragraph 4.03(g) of the DPB (Investment Business) Handbook and to include the wording contained within paragraph 4.03 of Schedule 1 to Part 4 in relation to insurance distribution activities.

Under the GDPR the firm will normally require the client to positively opt–in to receive this information. Further guidance is available in the helpsheet GDPR – Lawful basis for processing.

Any commission received must be dealt with in accordance with Regulation 4.15 and the requirements of the ICAEW Code of Ethics section 330.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.