View more on these topics

Damages limitation

It seems the British public is not prepared to shrug its shoulders and accept that poor investment advice is something it has to tolerate like rainy summers, crowded buses and bad restaurant service.

Gone are the days when what proved to be poor advice from an IFA was put down to bad luck for the investor. Today, advisers are increasingly at risk from the threat of a lawsuit for unsound advice as the UK moves closer to the US habit of calling in the lawyers at the first hint of trouble.

The ignominious fall from grace of Equitable Life, Britain&#39s oldest mutual life insurer, is just one among many minefields out there for advisers to negotiate.

But it is not just the advisers and consultants who recommended Equitable pensions after it became embroiled in legal action with guaranteed annuity pensioners who will be fearing a legal challenge. Those who are currently advising their clients to take the 10 per cent penalty and exit their with-profits policies may be ruing that advice in the near future. The fact that, for years, Equitable had some of the best-performing pension funds will not cut the mustard today.

Another area of concern is the current investigation into the misselling of free-standing AVCs. The debate hinges on whether or not an IFA should have advised their client to contribute to their in-house AVC or invest in a separate pension scheme. The FSA estimates there will be over 100,000 investors eligible for compensation after being given incorrect advice. The cost of this advice is estimated to set the industry back somewhere between £95m-
£200m.

What should advisers do to protect themselves if they find they are in any of the above situations? Their first step should be to identify all clients who could possibly have a right to claim to have been given bad advice. This means locating all client files and examining the advice given.

Did the advice meet regulatory standards at the time it was given? Does the client file clearly demonstrate compliance? Can the adviser demonstrate all the possible pitfalls were fully explained at the point of sale?

Being able to show all the above is a painstaking task and IFAs must have sufficient information to support the reasoning behind any recommendation that favours one financial product or service over another.

In most cases, advisers will have the relevant background notes to support the advice they have given. However, those notes must stand up to scrutiny by the regulator and the more stringent rules that are now being applied.

If any doubts remain, advisers should talk to their PI insurance broker and check their professional indemnity insurance will cover any potential claims or circumstances which may arise. The broker will be able to offer advice on the cover available under the PI policy. In addition, the broker will advise on what steps the IFA can take to limit exposure to potential losses.

During the course of the pension review, PI insurers have altered their stance on what constitutes a valid notification under the policy. Unfortunately for advisers, different insurers have been applying different criteria. Therefore, ensuring continuity of insurer is of paramount importance as an insurer will have less reason to decline a claim if they have insured a particular risk for a number of years.

However, this may not always be available to the insured, either because that particular insurer has withdrawn from underwriting that class of insurance or because the renewal premium being quoted is too great. It is very important, therefore, that before an adviser moves from one insurer to another, full disclosure is made to the new insurer. All potential notifications must also be made to the existing policy.

In certain circumstances, this can take the form of a blanket notification. Following the ground-breaking case of J Rothschild Assurance plc v John Robert Collyear and Others (1998), underwriters have, albeit reluctantly, accepted what is effectively one claim notification for all the advice that has been given to clients in respect of one particular area, for example, phase two of the pension review.

To proceed down this route, the insured needs to be able to demonstrate the likelihood that the majority of advice given in a specific area will be erroneous. Failure to do this correctly or not to disclose all known material facts fully can lead to the voidING of the policy by insurers at a later date.

Making a blanket notification is a last-resort action and should not be made without the adviser taking legal advice. The exact wording of such a notification is also very important so that it has the greatest chance of being accepted by the insurer.

The continuing pension and FSAVC reviews, as well as concerns over the sale of certain types of endowment policy, have drastically reduced the number of insurers willing to underwrite IFA business. In fact, numbers have halved over the last four years.

What is more, the regulator has stipulated the minimum limits of indemnity which IFAs must purchase and the maximum self-insured excess they can carry. These limitations have meant that certain advisers have been unable to purchase compliant cover, causing additional problems with the regulator.

While new entrants are starting to return to the PI market, they are being selective about the type of insured they want to underwrite. They now require a great deal of information before offering quotations but remember the broker is always there to lead clients through these pitfalls.

Recommended

Diggle leaves Treasury

Paula Diggle, the Treasury civil servant credited with turning IFAs&#39 lives upside down, is quitting as head of home financial services for an Inland Revenue role. IFAs say Diggle was responsible for much of the detailed financial services policy under Labour to date, including moves to axe polarisation. She dealt with the pension review for […]

L&G launches software package

Legal & General is launching a software system which will allow advisers to sell several products for only one plan charge. Available on compact disk, Protection Choices will enable advisers to offer a range of different products on one application form, with no duplication of personal details. L&G mortgage and protection director Richard Verdin says: […]

PolicyPlus International appoints investment manager

PolicyPlus International is appointing Tony Farrell as investment sales manager to promote its Endowment Growth Fund to intermediaries. The fund invests in traded endowment policies and is quoted on the Dublin stock exchange. Farrell worked for 17 years for Norwich Union, the last five spent as a branch manager. Farrell says: “I am looking forward […]

Mystery over ousting of LIA vice-president

LIA vice-president David Neith, who was due to become president next year, has left his post after a vote of no confidence from the board. Long-time LIA member Michael Bousfield has taken up the post but the LIA has not announced the change which was made last November. Neith, principal at Stratford-upon-Avon DN Financial Services, […]

Sierra Leone cover image - thumbnail

White paper — Sierra Leone International Insights

Jelf Employee Benefits assesses the areas that employers should be aware of when considering operating in Sierra Leone, including healthcare access, delivery and insurance provisions. This report draws on various sources to highlight specific considerations for this emerging jewel in West Africa.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    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

    Email: customerservices@moneymarketing.com