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Collegiate says Lehman may force PI rise

PI insurer Collegiate Management Services has warned that recent problems with Lehman Brothers-backed structured products could see PI increases.

Legal and claims director Martin Archer says the problems could have a “disproportionate” effect on professional indemnity insurance bec- ause of concerns about how the ombudsman will react.

Archer says: “The starting position for IFAs was that structured products backed by an A+ bank were low risk, suitable for low-risk consumers. Many would argue that it is unfair for advisers to bear the responsibility because you don’t expect A+ banks to fall over. But we have an ombudsman regime that is very sympathetic to consumers.”

Archer says it is unclear to what extent IFAs were expec-ted to flag up counterparty risk to clients. He says: “The risk is covered in the key features document and even the FSA has said it does not want advisers to painstakingly replicate all the information in that document so it is a difficult issue.

“But it is human nature that claims will arise. There have been a lot of people that were sold something labelled low risk and which have suffered potentially catastrophic con-sequences.

“This will be potentially worrying for some insurers and I would not be surprised if some want to know how many structured products advisers are investing their clients in.”

Lowes Financial Management managing director Ian Lowes says it is the responsibility of advisers to ensure that their clients understand the risks involved in structured products. He says: “Advisers should have made the risks clear in their reason why letters to investors, who would also have received the FSA Capital At Risk brochure.

“No one could have foreseen the loss but as long as all the right warnings were given about the associated risks, it is a case of just moving on. If the risks were not properly stated, the ombudsman may find in favour of the client.”

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