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FCA chief: PI cover is not working for IFAs


Professional indemnity insurance is often not working properly in the financial advice sector, FCA chief executive Andrew Bailey has acknowledged.

Speaking at the Association of British Insurers’ annual conference this morning, Bailey said that while advice firm failures were smaller than those of banks, PI insurers were frequently writing contracts that excluded the losses, leaving the FSCS and capital adequacy to pick up the bill.

Bailey said: “While losses as principal dominated the financial crisis – in other words, the failure of banks – and the interest costs of these failures remain even now the biggest costs being covered by the FSCS, failure of firms acting as agent are more common, if on average smaller.

“For agency firms, capital is not where we should start – as holding capital is an inefficient way of mitigating the risks posed by firms who are not typically a threat to the system. The front stop should be commercial insurance in the form of PI cover, much as it is for lawyers and other professions. But PI cover is not by experience always reliably performing the role, particularly in the IFA and investments world, – the contracts are framed often in ways that rule out loss absorption in the context we are dealing with here when the firm fails. What is the consequence of this? It is that the protection of client assets and ultimately the FSCS become the primary lines of defence, and this is what has happened.”

Bailey called on the insurance industry to input ideas on how to make the PI market and the FSCS work more effectively.

He said: “This is rightly a public policy issue, but it is also a private issue too because many advisory firms are meeting substantial bills for FSCS pay-outs. With all this in mind, my request today to the insurance industry is to help us to think through how we might solve this problem.”



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There are 14 comments at the moment, we would love to hear your opinion too.

  1. Here are a couple of suggestions Mr Bailey:-

    1. Put an end, once and for all, to hindsight reviews (constantly moving the goalposts is why PI insurers refuse to play ball ~ they aren’t going to expose themselves to another caning along the lines of the PIA’s pensions review) and

    2. Ensure that regulated firms aren’t providing advice in areas for which they don’t have PII cover. This will require a complete redesign of the FCA’s time-wasting GABRIEL returns so that the data they demand is both easy to collate and submit, is actually relevant to what the FCA needs to know and can be quickly and easily analysed. An automated flag-up function could be installed to highlight any potentially high risk activities, on which the FCA could then swiftly home in, starting with a demand for proof of relevant PII cover. I understand that AIFA, under Chris Cummings, put forward a submission along these lines (I don’t know the details) but was completely ignored.

    The ball is in YOUR court.

  2. It never has. It was always just another tax on doing business. Mr Bailey needs to ask himself why IFAs have to pay hugely more in premiums than (say) accountants. (We might know the answers but he needs to do the digging).

    There are excesses for every available excuse and heaven help you if you if you need to make a claim – you will probably not get insured again, or if you do get terms the premium would be stratospheric.

    Underwriters don’t actually underwrite, judging by the banal supplementary questions (which in many cases have already been covered on the application). And why do you have to fill in a great missive every year if there have been no claims or incidents? A simple half page declaration should suffice.

    Perhaps most of the forgoing applies more to smaller firms than the big outfits, but then there are a lot more smaller firms than large ones.

  3. Julian the ball is in the Advisers court – Advisers are the ones who cause this problem, regulators are not promoting UCIS to clients in exchange for hefty commission. You need to stop expecting people who are not advisers to improve the advice profession.

    Its really positive that the regulator has noticed this problem but I would imagine they have no power when it comes to changing PI contracts.

    • No strictly true Matthew. Many (possibly most) advisers do not want firms advising on unregulated products and bringing the financial outfall to their doorstep and would that we could change this, but we are not Regulators you see!

  4. Stating the blooming obvious really is the FCA’s bid for a gold at the next Olympics, do you not think ?

    As Harry pointed above…. it never has ! if an IFA were to have the perfect PI it would cost on parallel the same as a 17 year old insuring hi Bugatti Veron !!

    We have the perfect Pi by way of the FSCS equitable funding this is the way forward.

  5. Hundreds and thousands of contracts are issued every year and most clients are very satisfied with the service they get from hard working IFA firms. The odd “glitch” referred to by Matthew is inevitable but the regulator and insurer have taken the sludge hammer to the walnut. Most interaction with the FCA is at best misunderstood by us mortals or at worst a waste of time. The insurance is a tax and is disproportionate but all of the time we have an inept FOS, then we just have to suck it up. I’ve said before, the machine is broken and the gravy train that takes everyone to work probably looks at it sympathetically.

  6. Sledge not sludge, although,,,

  7. A very sensible observation and I hope this is indicative of Mr Bailey’s tenure.

  8. We always seem to be going round in circles with PI. PI Insurers provide claims made policies but are expected to pick up market losses such as Arch Cru and Key Data due to market failures/ poor regulation and FCA retrospective approach, this is not the same for Solictors. PI Insurers therefore pay substantial sums out/ regulation kicks in then disappears and then just as Insurers may have recovered their losses they then get stung by Unregulated Investments which the FOS seem to be able to adjudicate despite not being regulated. How in today’s society with a governing body such as the FCA is it acceptable for IFAs to advise on East European Property ventures especially when most individuals couldn’t pick out the East European country on a map let as no anything about that property sector. It is always easy to blame Insurers but premiums should be considerably higher to make the sector profitable for Insurers and with a cost increase, companies may find themselves having to review their practices and provide a wider risk management approach rather than a 4 page proposal form outlining 30 years of the company practice. The issues need to start off with regulation and then with better regulation, Insurers will feel more comfortable with providing competitive insurance policies rather than having to assess losses once the horse has bolted and the FCA are under pressure to compensate 1000’s of investors losses due to poor regulation.

  9. Andrew Baileys comments do highlight a major issue all advisers face and PI companies.

    The problem being that unless the PI company looks at every single business submission and standards fully, has agreed rules of what is and is not acceptable, they have no way of accessing the risk and future liability. Past claims history cannot be relied on. In a nut shell we the adviser cannot say with any certainty what we are advising today will be acceptable tomorrow and the PI company has no way to calculate the risk.

    The regulator has two options to improve this outcome.

    1) Provide rules and given outcomes that can be adopted as industry stranded and move away from guidance that actually does not provide any protection to anyone, other than the regulator.
    2) Bring about the change In legislation that makes financial advice and paperwork therein legal contracts. This would remove the current ability for the FOS to use the rules of most likely events, having to apply the rule of law. All to often we see claims upheld due minor technicalities or what they think happened.

    The issue perceived is that there is no way the regulator or the FOS will allow these changes to be implemented.

  10. As FOS and FSCS like to hoover up all potential claims, why don’t we simply do away with PI completely and just divert PI premiums to FOS and FSCS to distribute as they see fit. All complaints bypass the IFA to be dealt with by an F-pack quango. Then when some fly-by-night IFA wants to “phoenix” the FCA take input from FOS an FSCS about all past and pending claim before letting that individual adviser become authorised.

  11. A very sensible line of thought.


    Over a considerable number of years ‘Consumer detriment’ has been seen because the regulator has noted flaws in product design, marketing or understanding of outcome and purpose- and yes you have guessed it, all with the benefit of hindsight.

    Pi insurers see this, regulators do not it would appear.

    Regulation should be about being smart and not wise after the event. It should be about utilising experience when things going wrong to make sure mistakes and failures do not happen twice.

    Those ‘Manufacturers’ of product are in business to make a profit and that profit, as Paul Barnard observed, “can be made quite ethically and honestly”, but he has an “overwhelming feeling that our regulator just doesn’t understand the markets it purports to regulate”.

    To licence a product as fit for purpose, with that purpose clearly defined, as part of the process is the single most effective consumer benefit a regulator could put in place as it helps a PI insure to see what a true liability may be.

    It is the CAA equivalent of being fit to fly, it is the Food Standards Agency equivalent of safe to eat, it is the VOSA equivalent of saying your car is safe to drive.

    This decision is nothing to do with resource, it is to do with responsibility and who the finger points at when things go wrong. We should remember that as Sants pointed out at the TSC hearings if responsibility fell upon the shoulders of those at the FSA, nobody would want to do the job.

    A regulator cannot rely on someone else to do the job, and then get him or her to take the blame when it all ends in tears because they did not have the “resource” to do what was right.

    Some have suggested that the resource needed would result in a huge increase in fees, perhaps the contra view that because products are licenced there would be fewer failures to fund might be more appropriate.

    In any event, the FSA and FCA has never found it difficult to raise money to fund its activities in the past, in fact it just goes to the very banks it regulates to raise the money then bills those it regulates to pay it back.

  12. Since I first went DA in 2003, there has been NO significant change in my premium for my PI EVER. Exclusions have come and gone. I have had No complaints go to the FOS EVER. A PI brober has been paid to broker something that is about as much use as a chocolate fireguard every hear and I have paid my FSCS and other F=pack fees like a good little boy. but the one time PI insurance might have been useful, the FSA’s own machinations resulted in a PI exclusion when my next PI proposal was due.
    It needs to be remembered that dr Debbie Harrision now sits on the FS Consumer Panel, despite reccomending Keydata Life Settlement Plans as a sensible solution for 2-5% of a clients portfolio.
    Keydata was deemed insolvent by the FSA at PWCs suggestion due to an error in ISA construction whilst they were still in negotiations with HMRC. Subsequently it was found that over £100 million had been misappropriated from under the custodian banks nose and the then FSA who had undertaken numerous visits including ARROW visit is and auditors failed to notice too. NONE of my clients were invested in the plans where £100 million had been misappropiated from….. none of my clients complained about my advice to put 2-5% of their portfolio in to Keydata and yet my PI insurer at renewal excluded at renewal. As has been reported elsewhere, like Harry Katz, I settled out of Court. I wonder WHY they didn’t want to see me in court?

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