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Advisers warned over risk of PI insurers withdrawing DB transfer cover

Data on advice firms’ PI cover is currently being under-utilised, experts say

PFS chief executive Keith Richards

Professional indemnity insurers could withdraw cover for defined benefit pension transfers at renewal in the future if they see them as being too risky, Personal Finance Society chief executive Keith Richards has warned.

Speaking today at the Money Marketing Interactive conference  in Harrogate as part of a panel on regulation, Richards said several PI insurers have exited – and entered – the market in recent years.

He said: “The way PI works is it is an annually renewable contract and it is the right of the insurer to withdraw, alter the terms or remove cover entirely. We have seen some firms exit and join. The challenge we have in the future when it comes to DB transfers, if the insurers see that as an emerging risk that could impact them, then they have the right to exit the market at the next renewal.”

Also speaking on the panel, Zero Support managing partner Phil Young said there are more advisers working with exclusions on their professional indemnity cover than many in the market realise. He added that data showing the risk of individual firms is being under-utilised.

The FCA is examining professional indemnity insurance as part of its review into how the Financial Services Compensation scheme is funded. In its FSCS funding consultation paper, the regulator suggested it could lower the limit that PI insurers can charge for excesses and mandate certain run-off cover for when a firm has ceased trading.

As part of their Gabriel return, advisers have to supply information about their PI cover including start date and end date of policy, name of insurer, annual premiums, which areas the policy covers (mortgage, insurance, or retail investments advising), and any business lines the PI does not cover.

Young said information on advisers’ PI cover could be used to determine which firms might be at risk and which should potentially pay a greater contribution to the FSCS levy.

He said: “There is already quite a bit of information out there that no one seems to be using at the moment, apart from the PI insurers to say we are not going to insure them.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. O3 Insurance Solutions remian the only provider of 2 year polices for Advisory firms Professional Indemnity , coupled with our robust policy wording we encourage firms to seek a no obligation quotation and secure and their PI Insurance for the long term

  2. This danger has been created by the FOS and the FCA. The one will imply via guidance that a certain policy is if applied correctly, acceptable. The FOS then rules against the adviser, as they do not have to apply the basic principle of law, but feeling and what they believe was the likely events, which makes a joke of the whole regulatory system.
    Until the FCA either makes rules, laws which are binding or the FOS has to work to the rule of UK Law, the outcome will never improve for either consumers or advisers.
    Carry on as we are a there will be a national implosion of Pension Specialists, cost will become astronomical and no one will get advice.
    The reason neither of these bodies, the FCA or the FOS are in any rush to resolve this issue are two fold. One, they believe they can wait, by waiting they can apply hindsight, two, they do not wish to apply Caveat Emptor (buyer beware)when ruling on advice, which should be protected by the laws of contract under UK law. If this applied PI Insurers would at least have some idea of their liability.
    At what point does the Government act?

    • Apart from the FCA’s carte blanche refusal to bind itself to anything, a major sticking point with the idea of binding rules/guidance is that suitability (after the event, of course) is open to wide and inconsistent interpretation. Half a dozen (supposedly knowledgeable) people could examine the same scenario and recommendations and arrive at half a dozen different conclusions as to the suitability of the latter to address the former.

      For their part, clients tend commonly to display selective memories if everything doesn’t appear to be working out as hoped.

      And the principle of caveat emptor is almost impossible to apply because the FOS will usually side with the client who claims that if he’d fully understood the supposed suitability and implications of his agreement to proceed, he wouldn’t have needed to consult an adviser (even though the law dictates that he has to on all but sub-£30K CETV’s).

      Furthermore, even though the SR may have been as thorough as is humanly possible and included copious risk warnings and the client signed to confirm that he’d understood it all, the FOS may well overrule all that, not least by accepting the complainant’s claim that he didn’t REALLY understand it all and was led to believe that the declaration he was persuaded to sign was presented to him merely as a formality.

      All very tricky.

  3. If, as stated here, the FCA’s GABRIEL system requires advisory firms to declare any business lines not covered by their PII policy (I’ve been told it doesn’t, though this may have changed recently), it seems pretty obvious that even if people DO declare stuff like UCIS and that their PII policy doesn’t cover it, the FCA does damn-all about it. Isn’t that why the rest of us are facing cripplingly escalating FSCS levies? So, once again, I ask: Of what practical value is the GABRIEL system if no action is taken on the data submitted? Answers please on a postcard.

  4. Talk about stating the b****ing obvious.

  5. Charles Seymour-Cole 14th September 2017 at 4:33 pm

    This is why PI insurance is NOT fit for purpose and there needs to be an alternative system.

  6. It’s not just the case that they can withdraw cover for business you write now.

    PI covers you for the claims you receive during the time it is on risk, not the business you write at that time.

    So you insurer may be happy to let you write it now but then pull the shutters down when things go wrong.

    Fools rush in where angels fear to tread.

  7. Setting aside the basic tenet that being insured is a Really Good Idea for the moment, so many articles – and comments – like these overlook some basic regulatory mechanics.

    Not all advisers are required to have PI cover. Counter-intuitively, the larger you are the less likely you are to be a firm covered by IPRU-INV 13, the prudential rules which mandate PI cover. As a case in point, there’s been a fair bit of comment lately about the merits of IFAs getting discretionary management permissions; any firm that does this will be outside the scope of mandatory PI insurance (in the jargon, they’ll be a BIPRU firm).

    Even if you do have to get PI cover, there are ways around exclusions – typically, that you hold more capital against the risk.

    Ultimately the core issue is not about insurance, it’s about the capacity of advisers to put things right after they’ve gone wrong. The prudential barriers to entry for becoming an adviser are SO low that there needs to be backstops (plural – insurance and FSCS) to protect consumers.

    In our brave new post-crash world, given a blank sheet of paper to start with, some people might require ALL financial services businesses to be better capitalised rather than rely on the vagaries of third-party commercial support from insurers.

  8. Equitable fund the FSCS !!!!

    Guarantees all around, client and industry alike, and even the polluter pays which serious doubt they do now

    PI; even if you have it, it is not worth the paper its written on,

    Why would you be made to have expensive insurance that wont work, then be forced to pay again (double in many cases)for a lifeboat fund

    I have had my own PI for the last 17 or so years, no complaints, no claims, paid 10’s of thousands in premiums that the various PI companies have just pocketed, and yet I still pay out 10’s of thousands in FSCS levies

    Now just think of all the companies, like me who have no claims and the if those premiums were in a lifeboat fund (FSCS)

    I really dont think, one needs to be a rocket scientist to work out this lifeboat fund would be massive.

    • What you suggest is pretty much what Keith Richards of the PFS has proposed. Forget the insurers and instead use a centralised fund. In light of the FCA’s useless GABRIEL system (or, rather, its abject and ongoing failure to analyse the data submitted and to mandate special permissions for selling UCIS), there might still be problems with defaults but, overall, it could well be a better way forward.

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