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Hedge fund managers face Section 166 investigation nightmare, says insurance specialist

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Hedge fund and investment management companies may not be properly protected against the potentially disastrous effects of a Financial Conduct Authority investigation, a leading insurance broker has warned.

The costs incurred with an FCA ‘Section 166’ enforcement notice range from hundreds of thousands of pounds to several millions pounds, but many FCA regulated companies will not be adequately insured.
Charles Wintour, managing director of Allegiance Insure, discovered the problem when a hedge fund client asked about the precise areas covered by their policy.
‘The hedge fund manager asked me specifically about a section 166 investigation,’ he says. ‘The client assumed that it was covered by the policy. I’m afraid I had to say that in fact it wasn’t.
‘We were asked if we could find an insurer who would cover these costs but so far as I am aware there are no insurers who will cover an FCA regulated entity specifically for the cost of an FCA S166 Investigation.’ 
Costs incurred by individuals will be covered by Directors and Officers liability insurance, but Section 166 reviews are focused on the firm as a corporate entity and a D&O policy does not extend to corporate costs incurred in these types of investigations.
‘The minimum costs of a skilled person review of this type are usually in the region of GBP250,000 and they can run into several million pounds,’ says Wintour. ‘The total cost of Section 166 investigations between 2013 and 2015 was more than GBP200 million. ‘The companies who carry out the S166 reviews are normally top flight accountancy or law firms and their fees are very high.’
Allegiance Insure has a hard-won reputation for customer service and Wintour decided to create a tailor-made product himself to meet his client’s needs. The policy covers the costs of the investigation and legal advice from top professional services firm RPC on how to prepare for the review and co-operate fully with the regulators.
‘Section 166 investigations are not only costly, they can cause serious reputational damage,’ Wintour says. It will also divert the management away from the core business.
‘The policy really is an essential purchase. If you are not properly covered the effects of a prolonged investigation could be absolutely catastrophic.’

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