There are two European directives which potentially affect IFAs in the area of PI. The insurance mediation directive and the markets in financial instruments directive. The IMD covers insurance business and the Mifid covers investment advice.
The IMD requires all intermediaries to have cover of euro1.5 million from January next year. The text is inflexible and does not envisage waivers or a payoff between PI and the capital available to a firm. The Mifid requires additional cover and does allow a payoff between capital and PI but it does not kick in until 2006.
The most immediately interesting part of the Mifid is the provision for there to be a review of all PI requirements on intermediaries (which will include the IMD) which has to take place within 12 months of publication of the Mifid, which means by April next year.
There has been a belated realisation around the EU that PI markets are not exactly welcoming to intermediaries. Directives take ages and nothing stands still while they go through the mill. In 2002, I started uttering warnings about the problems of inflexible PI requirements. I could not rouse much interest in the rest of the EU nor among practitioners, never mind regulators. The Government did manage to reduce the level of the requirements but their wholesale rewriting to allow more flexibility was not popular.
By 2004, everyone had woken up to the fact that the PI problem did not respect national boundaries. Too late to change the IMD but in time to ensure a review was held.
Our job now (on which we are already embarked, with a lot of FSA support) is to get intermediaries and regulators in the EU to see that the answer lies in more flexibility and allow well-financed firms to trade off PI requirements against capital.
And what happens before the review is completed?I do hope that the FSA will itself show flexibility and not prejudge firms for any apparent breach of the IMD when their salvation could be imminent.
Incidentally, someone told me that the Spanish regulator closed down nearly 200 intermediary firms for failing to have PI. I hope no one from Canary Wharf is holidaying in Madrid this year.
Paul Smee is director general of Aifa