Lehman clause threat to IFAs
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Advisers have been warned they could have multi-million-pound exposure to Lehman-backed structured product claims due to exclusions in professional indemnity insurance policies.
Regulatory Legal partner Gareth Fatchett, who is advising IFAs on structured exposure, says the bulk of policies he has seen include an exclusion relating to insolvency of the underlying counterparty or provider which could give rise to uninsured claims.
The FSA has launched a wide-reaching review of the structured product market after uncovering significant advice failings. It is instructing firms to review past sales of Lehman-backed plans and is writing to Lehman-plan investors with complaint guidance. Fatchett believes this could trigger a large number of claims and advisers may not be covered.
He says: “The FSA notice on structured products creates an iceberg which many firms will not see until it is too late. Many firms do not understand the holes in their PI policies.”
Fatchett says the exclusion clauses started to appear in early 2009 and elements of risk relating to structured products have been excluded from cover at renewal by several insurers. He is forming a structured product group to help firms assess their PI cover and review past business.
PI insurer QBE European Operations says its basic policy features such an exclusion but it also writes custom policies with no exclusion.
A spokesman for PI insurer RSA says: “We do not apply a blanket structured products exclusion. For some policies, however, we do exclude elements of risk relating to this, for example, failed counterparties.”
Collegiate Management Services legal director Martin Archer says, of the 10 firms underwriting most of this business, around five have exclusions. “There are some quite nasty exclusions which will leave IFAs horribly exposed following the FSA’s action on Lehman,” he says.
PYV managing director Ian Boscoe says: “The majority of wordings from insurers do exclude insolvency. However, insolvency exclusion clauses are significant in instances where it is determined the intermediary has been negligent in dealing with their client. So far, I have not seen instances where negligence has been proven.”
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Readers' comments (13)
Anonymous | 12 Nov 2009 10:28 am
here is another nail in small ifas coffin...!!!!!!!
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The Mystery Shopper for IFAs | 12 Nov 2009 10:41 am
FSA asleep on the job again? What happened to their monitoring and approving of Lehman products? Oh yes I remember now, like the monitoring of the banks in 2008. FSA Nowhere to be seen until the horse has bolted again!
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Julian Stevens | 12 Nov 2009 10:42 am
So this review on the part of the FSA is "wide-reaching", is it, as opposed to "thematic"? Why do they always shy away from the correct word which, as we all know, is HINDSIGHT? The answer, of course, is that to do so might highlight the fact that the FSA has provided no regulatory guidance on the points that advisers should highlight when discussing these products with clients. Are hindsight reviews even legal?
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Anonymous | 12 Nov 2009 11:03 am
Why is it that IFA's have to give advice, only to be told when there is a problem, what they should have paid heed to at the time - yes hindsight. IFA's also do not have longstop.
Just because the complaint is generated in 2009 or 2010, should the insurer at the time of the advice be liable for any complaint? Lets face it, all we should do is change our terms to say that we will not advise on Structured Products, therefore we do not have to accept the complaint any more - oh no, thats possible just for those larger than IFA's.
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Evan Owen | 12 Nov 2009 11:11 am
Can negligence be proven? Would IFAs actually benefit from instructing a lawyer?
Bottom line is, did anybody foresee the collapse of Lehmans? Did anybody know that bank was involved?
If Standard life went belly up would IFAs be found responsible for that too??
Those of us who avoided 'structured products' like the proverbial plague might appear to be sanctimonious now but... I don't have any worries. No pensions transfers, no FSAVCs, no APPs, no complaints at all. However, we don't have a crystal ball do we? What horrors lie in wait for the unwary?
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Anonymous | 12 Nov 2009 11:11 am
Provided your suitability letter included the statement that the protection is not guaranteed and is subject to the underlying companies being solvent at the time of maturity then there should be no case for a claim to be upheld.
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Peter Turner | 12 Nov 2009 12:26 pm
I have just come across a case where an investor is taking an IFA to FOS and the IFA is simultaneously taking the PI Broker to FOS for failing to arrange appropriate cover.
Given that it is the responsibility of the FSA, not IFAs to police those it regulates, I wonder what would happen if IFAs then made their own complaints to the FSA that they were suffering as a result of making a recommendation in good faith, having assumed that the FSA had ensured the provider was complying with its rules and in particular Principle 4 ( and, in particular, Principle 4 (A firm must maintain adequate financial resources.).
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Phil Castle | 12 Nov 2009 12:58 pm
Just a reminder that the FSA pulled its only consumer facing facsheet on this subject in April 2008, up until then the wording of the factsheet (which many providers included in the product information issued to clients) clearly stated
This factsheet is for you if:
n You are considering investing in a high-income product.
It explains:
n the types of products that are ‘high-income’;
n the risks involved;
n some points to think about before deciding to invest; and
n where to get more information.
Many investment products offer higher rates of return than
you can get with ordinary savings accounts. The rates can
look attractive, but take care – your capital (the money you
put in) could be at risk.
High-income products can help you improve the amount of
income you get from your capital – but you need to feel
comfortable with the risks involved.
You should read the key features document which will be
included in the product literature the company sends you.
This will give you a more detailed explanation of the product.
"However, like shares, the value of
bonds can go down as well as up. Their value can also be affected if the company that issued them gets into difficulties. So, when the
bond matures, or if you want to sell it, you might only get back some or possibly none of your original investment."
This is the wording from the FSAs own consumer fact sheet (I copied and pasted it)
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John Doe | 12 Nov 2009 4:26 pm
Of course it is the very same FSA that obliges IFAs to buy these PI plans!
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F-Pack Crack Team | 12 Nov 2009 6:21 pm
I think IFAs and clients should complain to FOS about the FSA's mishandling of Lehman and lay the blame at their door!
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