Advisers have welcomed comments made by FCA chief executive Andrew Bailey that the professional indemnity insurance market is not working.
Speaking at the Association of British Insurers’ annual conference this week, Bailey said while advice firm failures were smaller than those of banks, PI insurers were frequently writing contracts that excluded the losses, leaving the Financial Services Compensation Scheme and capital adequacy failures to pick up the bill.
Bailey said: “The front stop should be commercial insurance in the form of PI cover, much as it is for lawyers and other professions. But PI cover is not by experience always reliably performing the role, particularly in the IFA and investments world – the contracts are framed often in ways that rule out loss absorption in the context we are dealing with here when the firm fails. What is the consequence of this? It is that the protection of client assets and ultimately the FSCS become the primary lines of defence, and this is what has happened.”
Highclere Financial Services partner Alan Lakey called Bailey’s comments a “very sensible observation”.
He added: “I hope this is indicative of Mr Bailey’s tenure.”
Page Russell director Tim Page said it is now clear the FCA understands there are “structural failings with the way PI contracts are constructed,” but cautioned premiums may still rise in the future whilst reform is pushed through.
He adds: “The reason I am relatively pessimistic about this is because the long-term solution to this is that we sort out PI contracts which will mean that IFAs end up paying higher premiums for proper cover.”
“The problem is that the high premiums will start while we are still paying the high levies to the FSCS and it will take a few years before the levies to the FSCS come down and so there would be a period where we will be paying double premiums and that will painful for the sector. It is a case of be careful what you wish for because they are aware that PI needs fixing but we need to be aware that to fix it will be painful.”