What is Fidelity Guarantee Insurance (FGI) and why is this cover currently in the spotlight?
FGI exists to safeguard your firm or organisation against theft of the firm's own money, securities or property by an employee, partner, contractor or volunteer. FGI can also be known as first party fraud, theft or employee dishonesty cover. The ACCA Regulations require that member firms in public practice with more than one member of staff have at least £50,000 cover in place for any one claim, to help protect the business and enable it to continue trading following a fraudulent act.
FGI has traditionally been covered by a separate section or clause within the professional indemnity insurance (PII), with ACCA practicing regulations stating that 'FGI may, but need not, form a single policy with such PII and all such PII and FGI must remain in force for all of the period during which a relevant practising certificate is held'.
Importantly, FGI cover should not be confused with third party fraud and dishonesty cover. Third party fraud and dishonesty refers to theft of the client's money, as opposed to the accountancy firms own money, and is usually covered within the main insuring clause (civil liability) of a professional indemnity policy.
Why is FGI cover causing concern?
Fraud claims have increased in both frequency and value in the past few years. There are several reasons for this, but the main factor is that online banking makes it so much easier to fraudulently transfer money. Lockton have handled numerous claims for first and third party fraud; in one case, a long standing member of staff was able to transfer funds from both the accountancy firm's own bank account and those of its clients directly into the bank accounts of their close relatives. This took place over a period of eight years and over £600,000 was misappropriated. The member of staff held a trusted position as a bookkeeper within the firm.
In order to reduce their exposure to fraud losses, some insurers have altered their policy coverage and other have applied particularly onerous terms and conditions.
There are a number of insurers that will only offer FGI on an aggregate basis, rather than any one claim. This limits the amount insurers are exposed to in a policy period, as once the aggregate limit is eroded by losses, they will not be required to pay any more. This kind of aggregate cover would not be complaint with ACCA regulations as cover must be on an 'any one claim' basis.
It's important to look carefully at the policy conditions – do these state that the accountancy firm's own accounts must be independently certified or audited on an annual basis for FGI to apply? Since most firms don't otherwise need their accounts audited, this has the effect of excluding first party fraud losses, thereby becoming non-compliant with the ACCA's regulations.
It's becoming more common for insurers that offer FGI to ask for dual authorisation for any financial transactions over a certain amount. For example, insurers may insist that there are two independent signatures on cheques or that any electronic transfer of funds is witnessed and documented by another director or employee. If this second authorisation check is not made, any subsequent first party fraud may not be covered by the policy and insurers may refuse the claim.
Often, an insurer will ask on their proposal form or statement of fact whether the annual accounts have been audited and if dual authorisation is in place. This acts to alert the firm that these procedures must be in place for FGI cover to apply. Other Insurers will simply include these terms within the conditions or exclusions of their policy wording, so this should always be checked to ensure coverage is complaint to ACCA regulations.
As fraud becomes increasingly prevalent, many insurers are beginning to leave FGI cover out completely in their accountants PII policies. While the ACCA stipulate that £50,000 of cover must be in place (as above), the ICA do not have any such requirement, so policies that do not cover FGI are acceptable to them. Therefore, even if a policy is ICA compliant, it may not necessarily meet ACCA's requirements.
To ensure that you have cover that meets the ACCA's requirements and to adequately protect your firm, we recommend:
- Checking that your policy provides FGI – the policy should have a separate insuring clause or extension headed 'Fidelity' and the insuring clause should contain language along the lines of: 'insurers will indemnify the Insured for any loss which the Insured shall first discover they have sustained by reason of any dishonest or fraudulent act or omission'
- Check the policy wording to make sure that there are no onerous terms or conditions which must be fulfilled for FGI cover to be valid