The Financial Conduct Authority (FCA) has told Alexander Forbes to pay £61.9m ($87.8m, €71.8m) over legacy issues relating to its former UK subsidiary, Alexander Forbes Consultants and Actuaries Limited (AFCA).
In a trading statement on 1 June, the South African advice firm said the money relates to an enhanced transfer value (ETV) liability, “which arises from redress payments being ordered, to the industry as a whole, by the Financial Conduct Authority […] in respect of certain thematic errors in historical advice”.
ETVs are a tool used by companies with heavy defined benefit (DB) pension liabilities to de-risk by incentivising scheme members to transfer out in exchange for an ‘enhanced’ retirement pot.
But a 2014 review by the FCA found that 34% of the advice given was “unsuitable”.
Further, it found that 74% of the disclosures made to scheme members was “unacceptable”.
AFCA was sold in 2012 to Jardine Lloyd Thompson Group, and subsequently acquired by Marsh & McLennan Companies, “inclusive of certain warranties and a limiatation of liability” – meaning that responsibility to pay redress remains with Alexander Forbes.
But the liability rose dramatically in 2021 to £61.9m, up from £12.3m the previous year, prompting Alexander Forbes to issue the trading update to outline the expected impact on the firm’s annual results, due to be published in the coming weeks.
Fighting with insurers
The issue has been further complicated by a conflict with two of its insurers.
The Alexander Forbes insurance programme, which also covered AFCA at the time, provides “cover for claims of this nature and is sufficient for the quantum calculated”, the firm said.
The programme features seven insurance layers, which in total provide cover for £140m above Alexander Forbes’ self-insured excess.
To date, ETV settlements have been paid from the group’s self-insured provision and from the primary layer of insurance.
But the firm added: “As the liability has increased through the year, management approached insurers for each increasing layer in the insurance programme to obtain confirmation from the insurance underwriters confirming that the event is covered in terms of the policy.
“We have confirmed cover for the second and third excess layers, however at 31 March 2021, the insurer in the first excess layer and the insurer for the fourth excess layer have not confirmed cover, sighting their disagreement with the application of the excess payable under the claim.
“Management has obtained senior counsel legal opinion on the dispute and remains confident that the position taken by the dissenting insurers is incorrect. The group will continue to pursue legal action on the matter.”
As a result of the increase in liability and the value of insurance that is being challenged by the insurers, the indemnities provided by Alexander Forbes in the original sale and purchase agreement of AFCA to Jardine Lloyd Thompson Group “will be invoked”.
Alexander Forbes has a limitation of liability included in the agreement, determined by the proceeds received on the AFCA disposal and excludes the sum recovered from insurers. The group has settled claims through its “cellcaptive insurance facility”, which reduced the potential future liability to approximately £13.4m at 2021-year end.
“As a result of the insurer’s not confirming cover to the extent of the liability, Alexander Forbes has provided fully for the potential liability of the matter in the amount of ZAR274m (£14m, $20m, €16.3m)”, the firm added.