Less than seven months remain for every UK IFA firm, regardless of size, to obtain the £1m insurance cover that all firms will need to comply with the European Insurance Mediation Directive.
From January 15, 2005, Brussels' new PI requirements mean that the FSA will no longer be able to hand out temporary PI waivers to IFA firms.
While many IFAs are finding that the surge in PI premiums may have peaked, the FSA still has concerns over the level of supply in the market, particularly as demand on the London insurance market for PI cover will increase enormously from next January, when all intermediaries in the countries signed up to the IMD start looking for cover.
FSA managing director David Kenmir made it clear to IFAs at the Money Marketing round table discussion two weeks ago that he is not a huge supporter of the £1m per firm requirement and says he wants to change the system at the earliest opportunity.
Kenmir said: “We are still worried about the PI market and the impact of the EU directive that introduces a large number of new firms that will have to introduce PI. We will not be able, without being in breach of EU law, to offer people waivers, which frankly is hugely unhelpful for us and for you. We are talking to various people about trying to get that addressed.”
According to Kenmir, the FSA is already calling for a review of the IMD, even before it has come into effect, favouring a more flexible approach that allows companies to reserve capital against liabilities based on potential risks in their business book.
But PI insurer PYV managing director Ian Boscoe says there is no science in the way the FSA assesses the amounts required for capital cover in lieu of PI when waivers are given and claims that changing from the current IMD plan of compulsory cover would leave IFAs exposed.
Boscoe says: “There is no sense of reality in the way the FSA calculates how much capital is required. When the FSA asks a firm to stump up more capital, it does not scientifically quantify how much is required so it does not bear any correlation to the exposure to risk.”
This means that IFAs will be leaving themselves vulnerable in the event that claims come from some unexpected quarter. Boscoe says: “Nobody expected the pension review, no one expected splits, endowments or structured products. If you have £50,000 capital adequacy against claims, that can be used up very quickly.”
Boscoe says other potential areas of complaints in the future might include equity release and critical-illness cover.
Baronworth (Investment Services) director Colin Jackson runs a firm with two RIs and he likes the comfort of insurance but says IFAs should be given the choice to do what is best for their firm.
He says: “A choice is the best option so the IFA can decide which route to take. The problem is we are in such a climate of claiming for everything, that you do not know what sort of claims you will face. I personally would always prefer to be insured but other IFAs may prefer to save their premiums and use their capital.”
Describing his vision of a future PI regime, Kenmir said: “Maybe we should be moving to some sort of regime where either you can have PI and a low capital requirement or you can have higher capital linked to the size of the back book.
“This takes you out of the hands of the insurers and into your own hands. You can then make some judgements about how you trade capital against paying for PI.”
Informed Choice managing director Nick Bamford welcomes the idea of greater choice in how an IFA structures its cover but says the problem still remains that, between now and when any change might come in, many IFA businesses will go to the wall specifically because of the PI issue.
Bamford's anger at what he sees as a pointless assault on a group of small businesses that are doing the general public a service is matched by his scorn for the way the EU could come out with such a system.
On being told that the reason given by the Treasury for accepting the IMD in its current form is “political horsetrading”, Bamford says: “Really? What did we get in return for accepting it?
“The point everyone is missing is that PI costs are putting small IFA firms out of business. We have a massive savings gap in this country and the FSA should be making it possible for the most successful sales channel in the market to be able to address that problem, not put them out of business.”
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