CASS 15.5 The insurance or guarantee method

This section applies when a safeguarding institution elects to protect some or all relevant funds using the insurance or guarantee method.

A safeguarding institution can protect relevant funds through an insurance policy if the policy complies with the conditions in CASS 15.5.4R.

A safeguarding institution can protect relevant funds through a guarantee if the guarantee complies with the conditions in CASS 15.5.4R.

1. The conditions are:
2. (1) the proceeds of the insurance policy or guarantee must be payable upon an insolvency event of the safeguarding institution;
3. (2) there must be no condition or restriction on the prompt paying out of the insurance or guarantee, other than the certification of the insolvency event;
4. (3) a certification requirement for the purposes of (2) must be no more onerous than is practically necessary;
5. (4) the terms of the insurance policy or guarantee must provide for the proceeds of the insurance policy or guarantee to be promptly paid into a relevant funds bank account of the safeguarding institution; and
6. (5) the terms of the insurance policy or guarantee must not permit or enable the provider to cancel the policy or guarantee prior to its expiry, unless:
   1. (a) such cancellation is due to the non-payment of the premium; and
   2. (b) the provider has given the safeguarding institution and the FCA at least 3 months' notice of its decision to cancel the policy or guarantee.

• (1) An effect of CASS 15.5.4R is that the insurance policy or guarantee must pay out the full amount of any claim regardless of why the insolvency event occurs. This includes, but is not limited to, where the insolvency event is caused by:

(a) any fraud or negligence on the part of the safeguarding institution or any of its directors, employees or agents; or

(b) something outside the control of the safeguarding institution.

• (2) CASS 15.5.4R also means that there must be no level below which the insurance policy or guarantee does not pay out.

• (3) CASS 15.5.4R(4) requires the proceeds of an insurance policy or guarantee to be payable into a relevant funds bank account. In practice, this means that the safeguarding institution will need to maintain such an account at least for the full term of the insurance policy or guarantee.

A safeguarding institution may use more than one insurance policy or guarantee, or a combination of insurance policies and guarantees. However, the effect of the condition in CASS 15.5.4R(2) is that the terms of each insurance policy or guarantee must not enable the insurer or guarantor to refuse to pay out, in whole or in part, on the basis that relevant funds are covered by another insurer or guarantor.  

A safeguarding institution must notify the FCA at least 2 months before it intends to: 

1. (1) rely on the insurance or guarantee method for the first time;

2. (2) change the amount of cover provided by its insurance policies or guarantees; or

3. (3) change its insurer or guarantor.

The notification under CASS 15.5.7R must set out:

1. (1) the person providing the insurance policy or guarantee;

2. (2) how the insurance policy or guarantee complies with the conditions in CASS 15.5.4R;

3. (3) when the insurance policy or guarantee expires, and if it renews automatically;

4. (4) whether the safeguarding institution has alternative arrangements in place instead of renewal;

5. (5) an assessment by the safeguarding institution as to whether the use of the insurance or guarantee method or the change to the safeguarding arrangements will lead to any increase in operational risk;

6. (6) an explanation of how the assessment in (5) was carried out; and

7. (7) a statement as to how the safeguarding institution will mitigate any increased operational risk.

The assessment referred to in CASS 15.5.8R(5) should consider operational risks such as:

1. (1) the insurance policy or guarantee not being extended or renewed, and the safeguarding institution not:

2.     (a) being able to find an alternative insurer or guarantor; or

3.     (b) having sufficient liquid assets to safeguard using the segregation method on the expiry of the insurance policy or guarantee; and

4. (2) adverse impacts on the institution’s short-term liquidity caused by restrictions on accessing funds that would otherwise be available if they were protected using the segregation method, contrary to regulation 6(5) of the Electronic Money Regulations and regulation 6(6) of the Payment Services Regulations.

1. A safeguarding institution must:

2. (1) decide whether it intends to continue to use the insurance or guarantee method in good time and at least 3 months before the expiry of its existing insurance policy or guarantee; and

3. (2) notify the FCA of its decision.

If a safeguarding institution decides to continue to use the insurance or guarantee method, but there are changes to the insurer or guarantor, or to the amount of the cover, it will also need to comply with CASS 15.5.7R.

A safeguarding institution should decide whether to continue using the insurance or guarantee method in good time before the expiry of the policy or guarantee. In practice, this means that a decision should be made while there is sufficient time to enable the safeguarding institution to make alternative arrangements to meet its obligations to customers. The greater the amount of cover provided by the insurance or guarantee method, the sooner a decision should be made. The safeguarding institution should keep the FCA informed at all stages in accordance with Principle11.

• CASS 15.5.14R applies where a safeguarding institution:
• (1) has less than 3 months remaining on an insurance policy or guarantee taken out for the purposes of safeguarding by the insurance or guarantee method; and
• (2) does not have a replacement for, or renewal of, the insurance policy or guarantee in place.

The safeguarding institution must: 

1. (1) make a plan as to how it will use the segregation method to safeguard the funds that would have been protected by the insurance policy or guarantee if that policy or guarantee had been renewed or replaced; and

2. (2) provide the FCA with the plan referred to in (1).

If the safeguarding institution is a small payment institution, small electronic money institution or a credit union that voluntarily safeguards under regulation 23 of the Payment Services Regulations (including as applied by regulation 20(6) of the Electronic Money Regulations) it may, alternatively, cancel its election to safeguard.

(1) If a safeguarding institution is unable to use the segregation method to protect funds that were previously covered by an insurance policy or guarantee, it should consider its financial position and take any appropriate steps (such as placing itself into administration) in good time before the lapse of the policy or guarantee so that a claim can be made.

(2) Where a safeguarding institution is required to safeguard, it is a condition of its authorisation or registration that it takes adequate measures for the purpose of doing so. If it does not have adequate measures in place to protect relevant funds in good time before the expiry of an insurance policy or guarantee, the FCA may consider whether it is appropriate to use its supervision powers to protect the interests of clients, including, but not limited to, its powers to apply to court to appoint an insolvency practitioner.