Six out of 10 insurers questioned had no contracts in place with PIs

Managers at insurance firms are unaware of the scope of investigations carried out in their name by hired private investigators (PIs), the Financial Conduct Authority (FCA) has warned.

The regulator questioned 10 insurers about their use of private investigators and found that eight undertook limited or no external due diligence on the quality and appropriateness of their work.

Half the insurers did not follow a formal procurement process and six did not have contracts in place with the private investigators acting on their behalf.

Most insurers in the review said that external solicitors or third-party administrators often instructed private investigators on their behalf.

The FCA’s head of general insurance Simon Green said: “While the majority of firms recognise the potential reputational risks to the industry from the use of private investigators, there is no consistency in the way private investigators are used, the activities they perform and the levels of due diligence conducted.

“If we are to build greater trust and confidence in the insurance market, insurers must take their responsibilities seriously.”

Two insurers had no management information on the number of claims where a private investigator had been appointed. And only one was able to show how frequently private investigators appointed to undertake surveillance activities had actually identified any evidence of claim exaggeration or fraud.

The FCA said: “Such information could help monitor whether the insurer’s fraud indicators are appropriate and ensure that claimants are being treated fairly.”

The regulator said it would take “appropriate action” where it found indications of specific failings and poor practice and will continue to look into work being done by firms.

The FCA has published a fact sheet which spells out insurers’ responsibilities and the regulator’s findings.

“We expect insurers to ensure that the work performed by the private investigators, which impacts upon their claims handling practices, is consistent with their regulatory obligations under SYSC [senior management arrangements, systems and controls], PRIN [principles for business] and ICOBS [the Insurance Conduct of Business Sourcebook], and they are able to evidence this,” the regulator said.

“We expect all insurance companies that use private investigators to read and understand the fact sheet, and contact us if they are unsure of anything or have concerns,” Green added.

The regulation of private investigators is likely to come into force next autumn and will be carried out by the Security Industry Authority.

Licences will be granted to investigators with a government-recognised qualification who have confirmed their identity and undergone a criminality check.