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FCA director: PI cover ‘largely doing what it says on the tin’

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FCA policy director David Geale

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.

FCA proposes provider contributions to FSCS

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.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Is that 85% of claims by value (or by number of claims)? If it’s 85% by value then I guess the insurance is doing its job, but if not, it would be interesting to know the percentage by value (which is what matters).

  2. Another box ticker that knows little of the real ‘world’ of business. PI isn’t really worth the paper it’s written on and each and every year the application forms get longer and longer and longer. Scrapping PI would be best and replaced with a product levy. This means the consumer being protected would pay for it directly and in a more fair way. The whole thing needs overhauling.

  3. A further issue is the FOS, until advisers and insurers can act in good faith and confidence, this will only get worse.

    The law has to be applied by the FOS, not what they believe happened. This is why the paperwork has become so complicated and long winded.

    As for pension specialists, PII is looking either very expensive in the future or even non existent.

    The FSA gives only guidance, no rules, the FOS then provides judgement and compensation payments not based on law, not on rules, so based on WHAT? These are the questions that need to be asked and addressed. These issues corrected could give the PII, advisers and consumers confidence and certainty, which we do not have today.

    • I agree. I change my opinion over time and outside input. How can an insurer cover an infinite risk of changing FOS opinion? FOS should be law & rules based & appealable, then PI might be more worthwhile than a chocolate fire guard!

  4. “The challenge is what is a risky product? What is a risky product for me might not be a risky product for you”

    I’m not persuaded by that argument at all. There are certaint products that carry inherent levels of risk.
    We could probably toss a significant proportion of UCIS into the ‘risky product box’
    Synthetic ETFs? Risky product. Highly leveraged investments? Single asset investments? Risky, risky, risky.
    It’s not about what me or you (or anyone else) perceives as a risk, it’s the probability of an investment failing to deliver a minimum objective – and that’s far more easily quantified.
    It sounds more like the FCA’s big issue with this is one of culpability. They don’t want to be facing the music when a product they classed as ‘non-risky’ fails.

  5. PI still has the fundamental flaw that it might cover you now but when the insurer gets a whiff of possible claims coming in it can refuse to renew cover, leaving you with nothing when you actually need it.

    So it might be “doing what it says on the tin” but that does not change the fact that when you open the tin it might be past its sell by date and the contents found to be rancid.

  6. Baldrick!

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