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Can they bake a cheery PI?

An IFA who is having to close his doors and lose his livelihood after 30 years due to having no PI cover was overheard saying: “Asylum seekers have greater human rights in the UK than IFAs do.”

I can sympathise as my own medium-sized firm has had no PI cover for several weeks. At renewal, my insurer had closed to all new business. Last week, I finally got compliant cover – at a price and with an excess of £25,000 per claim. This amounts to self-insuring as the average claim in the UK is under £10,000.

I have to say I found FSA head of investment firms David Kenmir and his colleagues helpful and sympathetic to the problem. They put me under no pressure and I was invited to consider applying for a PI waiver. I have no doubt I would have got it if my company was prepared to set aside a six-figure sum. However, my view is that I make profits in order to pay the directors&#39 dividends, not to have money tied up to meet possible claims.

In practice, 90 per cent of IFAs would be forced into liquidation if they had a series of claims at or above today&#39s mad PI excess levels. The liability would typically then fall on the Financial Services Compensation Scheme. Why then, I ask, do we need PI cover when we have a perfectly good industry compensation scheme? If we all paid in more, this alone would suffice and we would no longer need be held to ransom by a handful of PI underwriters. I understand from Kenmir that this option is being considered but would entail a change in legislation.

On a less positive note, the FSA has implied that a benefit of the PI crisis is that it will weed out the “bad” IFAs. It seems a strange admission of failure by the regulator for it say there are any “bad” IFAs left after a decade of over-regulation. It appears that the FSA does not mean IFAs who give unsound advice but rather ones who have not complied fully with its often bureaucratic demands or have unpaid fees or Financial Ombudsman Service awards.

My broker says the PI crisis is a direct result of the regulator&#39s past reviews, including its invitations to policyholders to make claims (R U Owed, etc), and to a lesser extent the PI policy wording and sum assured insisted on by the FSA.

My company has to have PI cover of £3m per claim, despite the fact that our maximum claim could only be some 5 per cent of this figure, according to my estimations, as our average commission per case is £600. The fact that architects and surveyors need PI cover of three times fee income per claim is totally irrelevant to the IFA market and it is about time that this twigged with the regulator.

I have some sympathy with the underwriters as who wants to insure IFAs when the regulator, backed by the Consumers&#39 Association and some of the press, appears bent on our industry&#39s destruction? IFA numbers have been decimated and most insurance company salesforces disbanded.

The FSA&#39s website is a clue to the compensation culture which prevails there, while one of the FOS&#39s own newsletters referred to itself as the one-stop compensation shop.

The manner of the various pension reviews was unjust and some say illegal. I believe that millions, if not billions, of pounds have been wasted due to our unique and flawed practice of paying compensation based on hypothetical assumptions when no loss has actually occurred.

If I trip over something in the supermarket and break my leg, I may be able to claim compensation. The UK has not yet gone mad enough to pay me compensation simply because I might trip over on my next visit.

Personal pensions may end up giving better results than final-salary occupational schemes, many of which have now closed, or where the members compensated have since changed employment. FSAVCs may pay out more than matched AVCs. Mortgage endowments may recover and pay out the target figure in 10 to 15 years time. Will those compensated then repay the compensation at maturity? We all know there would be no such thing as endowment misselling if policies were on track.

Except in blatant cases of misselling, who can say what is or is not best advice? No two advisers would give the same advice. Misselling cannot be defined by the FSA. Why can it only be spotted after the event?

Finally, a point not widely realised is that, at law, an IFA is simultaneously an agent of both the client and the product provider. I mentioned this to the FSA and it did not dispute the point. Why then are the product providers not in part at least responsible for their agents&#39 actions and sales? If they are (as must be the case), this could dramatically reduce an IFA&#39s liability and PI requirements.

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