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At last the FSA puts its finger in the PI

The professional indemnity problems faced by IFAs have been getting worse but there could be help on the way from the FSA.

IFAs are looking at massive premium hikes. One IFA says in the last six months, seven out of 10 IFAs he knows have left the industry because they could not get PI insurance or because the premiums were too expensive.

The problem is now being made worse because not only are premiums rising but the extent of cover is narrowing.

PI insurers are looking to limit their exposure to risk by excluding some business types from policies but still marketing them as compliant.

For areas of business such as contracting out of Serps, opt-outs from occupational schemes and non-joiner business, insurers are slapping on huge excesses, with one IFA saying premiums have soared by 300 per cent.

Now there is a growing concern over split-cap investment trusts. PI insurers are desperate to avoid another debacle such as the pension review and IFAs with split-caps on their books are expecting a big increase in premiums.

One IFA says: “PI policies are not worth the paper they are written on these days. The insurer is looking to make as much money as possible but not to make a payout. If the FSA continues to push on this, I do not know where it is going to lead. I think a lot of IFAs will just leave the industry.”

The AITC is concerned that IFAs will not be able to advise on investment trusts in general despite the fact that split-caps make up a relatively small proportion of the market.

Technical director Ian Sayers says: “Some of the most serious problems have only affected a minority of split trusts and splits for that matter are only a minority of investment trusts. It would not be fair for every IFA who advises on investment trusts to see their premiums whacked up.”

If the proposals from the Sandler and Pickering reviews are implemented, IFAs&#39 liabilities could increase as it will be left to them to interpret the lighter-touch regulatory regime.

Scottish Equitable pensions development director Stewart Ritchie says the enduring theme from Pickering is a less prescriptive and more discretionary regime, which could leave IFAs open to further demands from PI insurers.

Ritchie says: “An IFA would not be able to protect themselves by simply ticking boxes. To the extent that the adviser uses judgement, that judgement will be open to scrutiny in a way that ticking boxes has not been.”

While conceding that for the pension industry generally this could be a sign of progress, Ritchie says it could be yet another factor that puts pressure on PI premiums for IFAs.

The demands on the FSA have been mounting for some time to get involved and take action in the PI market. IFAs argue it is not reasonable they should have to take out cover in a market with limited players constantly pushing up prices.

It seems the FSA may finally be listening. Last week, it asked Aifa to survey its membership, focusing particularly on small and regional IFAs, to find out their views on PI.

FSA head of investment firms David Kenmir says he is aware of the issues and wants to think seriously about taking action before November when many advisers face renewal.

While not saying what action the FSA would take, Kenmir says the regulator is taking a much more sympathetic view towards IFAs who try and get compliant cover but are unable to do so.

In the age of non-statutory regulation under the PIA, having PI cover was mandatory. The key difference was that firms which had legitimate difficulties in getting cover did not always automatically face being forced to stop doing business.

What appears to be happening is the FSA is moving back towards the PIA way of doing things by taking into account other factors such as capital ade- quacy. The question is what action it can take now that the market is in such poor shape.

Michael Philips sole trader Michael Both says: “The biggest risk that the PI insurers have is the same that IFAs have – the risk of action from the FSA.”

PI brokers argue this is a finite market with only a limited ability to swallow risk and IFAs have proven to be the biggest risk for some time.

PI broker Manchester Dickson marketing director Michael Dickson says: “We are in the most difficult market in the last 20 years, regardless of whether you are an architect or an IFA.

“IFAs have been dealing bad news to insurers for the last 10 years. If you are faced with 10 risks, nine are nice risks and one is an IFA, which are you going to go for?”

Dickson suggests that the problem with getting compliant cover is much greater than anyone is so far saying and he knows many IFAs who do not have compliant cover. He believes the only solution is for the regulator to change its rules.

He asks: “What happens when the rules state you have to have PI cover and there is not any PI cover available? The regulator changes the rules.”

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