Professional indemnity insurance is “largely doing what it says on the tin”, according to FCA policy director David Geale.
Speaking with Money Marketing after the release of a consultation paper on Financial Services Compensation Scheme reform today, Geale said that while earlier statements from the regulator had called the market into question and that issues remain, further investigation had found that the cost of radically overhauling PII by introducing reforms such as mandatory terms on policies or forced run-off cover could cause further risks.
Geale says: “What we said in our previous document is that we had some concerns about the contributions of PII towards the eventual bill. We have gone away, looked at the market, spoken to insurers and users, with a number of options for how that market can be improved.
“What we have learned is PI cover is largely doing what it says on the tin. The challenges around when the firm is in run-off, those remain.
“Of course its a difficult contribution between costs. You could increase [cover] levels significantly, but can you do that at a price the market can afford, so you don’t cause a whole separate set of problems?”
The FCA released data today from its analysis of the market, finding that nearly 85 per cent of claims over the last ten years were met by a combination of PII and the excess on investment firms’ policies.
More than 90 per cent (94 per cent) of a sample of advice firms surveyed by the regulator said there were no products they would like PII to cover that are not generally covered.
The FCA’s favoured solution was put out to consultation today, which would introduce measures to prevent advisers from buying PII policies that exclude claims when the policyholder or a related party is insolvent so the FSCS can still claim on them.
The FCA confirmed measures for advisers to disclose risky product sales in their regulatory returns, but Geale says the market will have to wait and see whether or not this can be used to charge FSCS levies based on how much risk a particular firm is taking.
He says: “First of all we need to see what the return shows us. We are keen to get as close to the principle of polluter pays as possible.
“The challenge is what is a risky product? What is a risky product for me might not be a risky product for you…It’s not an easy thing to link future compensation to the products of today when you don’t know what will cause the claims.”
However, Geale says that the purpose of the current FSCS review was not to remove unregulated investments from coverage entirely, as adviser trade bodies such as Apfa have campaigned for.
Geale says: “Nobody likes paying for the compensation, but they like the confidence that comes from having it. If the investor sees an adviser, they should be able to trust and rely on that advice. They take confidence from having a scheme to back that up if it turns out to be wrong and the firm goes out of business.”