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FSA is looking for a new recipe for PI

The FSA&#39s willingness to reconsider mandatory professional indemnity insurance has taken the industry by surprise.

While many IFAs have welcomed this is as a pleasant surprise, lawyers and insurance brokers are horrified that PI could be scrapped.

The proposals are set out in the FSA&#39s consultation paper on its new Integrated Prudential Sourcebook. It acknowledges it is primarily IFAs who are affected by the obligation to take out PI.

The paper sets out both sides of the argument, recognising the merits of both, stating that it “particularly wel- comes comments on these proposals”. From the FSA, there is a eagerness to show itself as a new regulator willing to rethink PIA rules.

FSA spokesman Robin Gordon-Walker says: “The creation of the FSA allows for things to be looked at again from scratch and improved if necessary.”

On the plus side, the regulator says the PI requirement helps it meet its statutory objective of consumer protection. It also points out that PI eases the burden on the Fin- ancial Services Compensa-tion Scheme and usually pays out in full, whereas Investors&#39 Compensation Scheme payouts are limited to £48,000.

On the arguments against PI, the paper says it may allow a level of control being passed to underwriters, the possibility of some firms not being able to get compliant cover and the cost of cover acting as a barrier to entry into the market.

The possible alternatives to PI listed are additional capital requirements, mutual schemes, in-house insurance, bonding schemes and assigned risk pools.

Aifa director general Paul Smee welcomes the opportunity for a fundamental review of PI. He stresses there is a six-month consultation period on the 154 page paper which contains a raft of high-impact proposals.

Syndaxi director Robert Reid says: “IFAs feel they pay a lot for PI and do not get much in return. I am impressed with the FSA&#39s understanding of the issue.”

Informed Choice managing director Nick Bamford says in the litigious climate he would be unwilling to do business without PI although he adds that many IFAs hit with soaring premiums and big exc-esses might take the chance.

Kangley Financial Planning managing director Geoff Kangley says: “If IFAs practised without PI, I would assume they were in it just to make a fast buck. It is just good business practice to have insurance, particularly with the retrospective legislation we have seen.”

At present, firms just setting up and which have a clean history and no pension review liabilities would have to pay between £1,500 and £3,000 for PI cover. Excesses tend to be very high, meaning IFAs only resort to their cover for the most serious of cases.

Some question the sincerity of the FSA&#39s consultation. PI broker Collegiate managing director Tony Howe says: “Whenever the regulator has considered the question in the past, it has come to the same conclusion and that is to keep PI.”

But Howe accepts there are problems with PI as it stands. “Most of the problems are of the regulator&#39s own making. They should tailor compliant cover to what is available on the market,” he says.

Rule 722, invoked for the pension review, and under which the PIA could direct an industrywide review of a class of business, is held to be one of the culprits.

The rules means that at any time a retrospective review of any area of business could be initiated. Howe says: “It is like asking insurers to insure the whole of Britain as a hurricane approaches.”

His defence of PI has support from a different quarter – the lawyers. On the potential scrapping of the requirement, ProAct Legal principal Gareth Fatchett says: “It does seem like folly after the amount of money that people have been paying out after the pension review. I cannot see why they would want to even consult on the issue. I think this is highly unusual and that it is unlikely this will happen.

“Can you just trust IFAs to insure themselves? Without PI, IFAs will be totally and utterly liable personally. If financial services wants to be seen as a profession, then they should follow lawyers and accountants who are obliged to have PI.”

How do those professions deal with the PI issue? Solicitors have seen upheaval in how PI has been administered. Until September last year, there was a Solicitors Indemnity Fund which was, in effect, a mutual run by the Law Society. Members would also buy top-up insurance on the open market. However, the fund was in trouble and, after a vote, all insurance is carried out on the open market from approved insurers.

Accountants are obliged to take out PI and do so from a sanctioned list of providers. To counter the problems of poor history, the accountancy profession has a “sin bin”, with collective cover for a limited period of two years for people to re-establish themselves.

In financial services, there is little support for the status quo, with even the staunchest defenders of PI accepting that at least a redrafting of contracts and reformulation of the requirement is necessary.

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