View more on these topics

Capital issues

Paul McMillan reports on the industry reaction to the regulator’s proposals for capital adequacy and professional indemnity insurance.

The 42-page paper investigates how radical changes to capital adequacy and professional indemnity requirements of advisers could benefit consumers and levy-payers by reducing instances of misselling and ensuring a lighter burden for the Financial Services Compensation Scheme.

It makes the case for a substantial increase in capital adequacy requirements, suggesting the current flat rate of £10,000 is “too small to be material” and the relationship between capital resources and misselling is too indirect to provide a “requisite incentive”.

But Aifa director general Chris Cummings says there is no proven link between the financial resources of a firm and its likelihood to missell or not treat customers fairly.

He says: “This is a complex and contentious paper which muddles a number of serious issues. There may be a case for reviewing the capital requirements for personal investment firms, but this FSA discussion paper is based on a false premise and demonstrates a poor understanding of the way in which firms manage their businesses.”

Cummings says the FSA should focus its energy on investigating a better system of run-off cover for advisers who are leaving the industry – an issue the FSA mentions in its paper although there are concerns over expense.

His concerns are shared by compliance consultant Adam Samuel who urges the regulator not to act until a link between capital adequacy levels and misselling is proven.

Samuel also hits out at another contentious part of the paper which accuses some advisers of holding extra capital resources as a deliberate strategy to pay future misselling claims rather than dealing with misselling within the firm.

He says extra capital held by firms is down to issues of liquidity and to guard against risks such as market downturns, employment law claims and rent increases, not to pay for misselling.

With PI requirements, the FSA paper suggests that linking premiums to the likelihood of misselling would provide an incentive to improve behaviour.

To do this, the FSA suggests that PI insurers should undertake risk assessments of individual firms and pricing PI cover on the basis of the likelihood of misselling claims.

Collegiate legal and claims director Martin Archer says insurers already do intelligent risk-rating when writing adviser business. He believes the costs of further risk assessments would be disproportionate and is doubtful it would produce the desired results.

PYV chief executive Neil Pointon is also sceptical about the ability of PI insurers to make such risk assessments. He says: “Underwriters are already factoring in risk assessments when offering cover to advisers. Increased PI premiums already penalise those firms which have excessive claims, whether by volume or quantum. If the FSA is trying to use this as a way for the PI industry to police advisers it is difficult to see how this can be used to a greater effect than it already is.”

Archer questions what concrete information the insurers can use to assess risk except previous claims against firms, which are already taken into account.

The FSA paper also looks at removing the £5,000 excess level on the basis that as most claims are less than this level, PI premiums are unlikely to be useful as an incentive to reduce misselling.

But Pointon suggests this may not be a sensible move and is unlikely to be welcomed by insurers which would have to deal with many small claims.

He also suggests that the move could be counter-productive to the FSA’s incentive goals as advisers’ PI premiums could rise significantly but advisers with a claim would not have to cover the cost of the excess.

Both Archer and Pointon also warn that the idea of moving from a “claims-made” to a “business-written” basis is impractical. Pointon says: “It does not happen for any other profession so why would it work for advisers?”

The FSA paper says the current “claims-made” system, where the insurer is responsible for claims made during the time of the policy, is a weak incentive for insurers to assess the risk that advisers will missell during the period of their policy.

But Samuel backs up Archer and Pointon by pointing out that no insurer is likely to offer “business written” in large volumes without threatening its own capital position.

Pointon points out that during the 2003 PI crisis the FSA ran a useful PI forum to gauge the industry’s opinion about policy and suggests if the regulator has consulted more with the PI industry before publishing this paper it would not have come out with so many ideas lacking industry support.

Cummings says that many of the unpopular proposals in the paper have been lobbied for by the banks after the bloody nose they received over the reform of the Financial Services Compensation Scheme.

The proposed FSCS restructuring, announced in March, offers a fairer deal for advisers but the British Bankers’ Association is angry that the plans mean its members would have to subsidise other sectors and is thought to have investigated the possibility of launching a judicial review of the proposals.

Cummings says the prudential rules paper could be a dangerous way for the FSA to placate the BBA and the Association of British Insurers over its FSCS plans.

The prudential rules paper is obviously integrally linked and the retail distribution review, a point underlined last week at an ABI conference when FSA director of small firms Stephen Bland warned if its prudential rules proposals were not accepted the future of the general financial adviser category would be thrown into doubt.

But some question the consistency between the two papers. Beachcroft Regulatory Consulting managing director Richard Hobbs points out that the consumer detriment analyses in the two papers are different.

He says the RDR paper suggests two forms of consumer detriment – misselling and lack of access to the market, but in the prudential rules paper the detriment is misselling and extra burden on the levy-payers. “The question the FSA must answer is why there is this difference,” says Hobbs.


Snowdonia Fof gets new benchmark

Buckles has changed the composite benchmark of its Snowdonia growth fund of funds as it felt the previous benchmark did not reflect the portfolio’s global remit.The fund, managed for Buckles by UBS Wealth Management, was launched in 2004 with a benchmark comprising 50 per cent FTSE All Share index and 50 per cent MSCI World […]

Friends takes lead on non-disclosure with CI payout deal

Friends Provident has been praised for paying out on critical-illness claims which would otherwise be declined due to unrelated non-disclosure.Friends will pay a proportion of the total claim. For example, if a claimant had been paying premiums of £40 but the non-disclosed information would have increased premiums to £80, Friends will pay out 50 per […]

Nationwide 25-year fix at 6.39% has decade’s ERC

Nationwide has responded to Chancellor Alistair Darling’s calls for more 25-year fixed-rate mortgages by introducing a loan starting at 6.39 per cent.But the product has been described as uncompetitive by Savills Private Finance director Melanie Bien.The mortgage is fully portable and has no early repayment charges after the first 10 years. The rate rises from […]

Accord moving into right to buy sector

Accord is set to enter the right-to-buy market in September after getting authorisation to operate in England, Northern Ireland and Scotland.It is waiting for authorisation from the Welsh Authority, which is expected in August.Accord managing director Linda Will says the RTB market is coming back into vogue. She says: “A lot of the remortgaging right-to-buy […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm