The health monitor on my mobile is currently in raptures. It seems I am hitting my steps target every day, but this is not due to a sudden desire to be fit. It is the fall out of Financial Ombudsman Service’s barking idea to increase its maximum pay out to £350,000 and the resulting problems with professional indemnity insurance. I am on a perpetual London tour and it’s taking its toll, especially on my knees.
Current coverage on PI does not explain the complex nature of the issue or the dangers that it contains. So, what is really about?
Most adviser firms received an email at 7pm Friday March 29 demanding that they prove compliant PI coverage by Monday April 1. This impossible task was the regulator “trying to be helpful” or so they told me at our second meeting last week.
For advisers, the issue has a number of levels, each more complex that the last
The first level shows that some insurers had contracts that stipulated a maximum amount – generally, around £150,000. That makes their post April 1 cover non-complaint. This appears to have been quickly resolved by the PI market removing any numbers in their contracts. Great, but that is the easy part.
The second level is a much bigger issue for advisers. How are insurers going to treat the larger claim when it arrives and what impact will that have on excesses and availability of cover? There is still a distinct lack of clarity here, but some insurers are likely to effectively create two excesses.
For the sake of clarity, let us imagine that FOS grants a claim at £350,000. Your PI insurer accepts the claim. You pay your excess of, say, £20,000 and the PI insurer pays the next £130,000 as per your policy limits. But we still have £200,000 missing. That amount – or at least a percentage of it – becomes your second excess. Do you have reserves of £220,000? No, I didn’t think so.
So why, after doing a consultation that overwhelmingly told them not to do it, did the FCA increase the limit? The answer is those at the FCA believe that, in some cases concerning pension transfers and small to medium-sized enterprises, there will be a significant number of cases above the £150,000 threshold.
Here we hit the final level and – in the long term – it is the most dangerous
Those of us who are fans of the common law would suggest that anyone with a claim of £150,000 or above should be applying to a proper court for resolution. Any other commercial claim would have to do so. Libertatem believes that the ability of FOS to make judgements without recourse to appeal should be limited to £25,000 and that would already be four times what the small claims court can award.
But from the FCA’s perspective, many of these claimants would see the cost and complexity of a High Court case either excluding them from pursuing that route or, if they went down the no-win no-fee lawyer route, the success fees incurred would savage the amount received.
From both the PI insurers and advisers point of view, the ability of a discredited ombudsman to make decisions at this level without recourse to meaningful appeal is profoundly dangerous.
The FCA have told me that the FOS is dedicated to improving its service and is going to employ staff with greater expertise of financial services. If this is true, then it is good news. But I have also been told over the years that simplified advice would resolve the RDR issue, that robo-advice would be profitable and that no deal was better that a bad deal, so forgive me if my cynicism is showing.
What is needed is a mechanism that resolves claims in excess of £25,000 without immediate recourse to the High Court, but also comes with a practical appeal mechanism. That way the PI insurers and advisers may have more confidence in the system while the claimants will still have an inexpensive method of resolution.
So that is why Libertatem is creating The Resolution Working Party. I have already assembled members of the PI market, advisers, City lawyers and a QC. I also expect representatives from professional bodies, networks and compliance. Our first meeting will be after Easter and our task will be to create a new resolution process that gives comfort to all sides in a dispute. It should be possible to achieve, and a lot of work has already been completed.
The regulator is finally recognising that the current FOS regime is not ideal for large claims, so we want to be in a position to help them. At least this way, we may be able to bring about a system that is right, fair and proper – as well as affordable to all concerned.
I have been combining my PI tour with a number of meetings regarding another of Libertatem’s initiatives – Adviser Train.
The Heath Report 3 identified an increased number of advisers wishing to retire. To maintain existing numbers, we need to recruit and retain 1,650 new advisers a year in perpetuity; easily four times the current organic growth. Unless we bridge this gap, it is likely that the cost of regulation will choke those companies that remain.
The Government’s Apprenticeship Scheme is in pole position to fund this increase, but we will need to create a body to collect and distribute both the funds and expertise needed. This week, we had meetings with those bodies already doing it and they have offered us help and support.
Next week advisers will receive a small survey which will identify those willing to host new entrants and to upgrade existing staff into more advisory roles.
Adviser Train must leave the station and quickly, but issues like “benefit in kind” are currently blocking the way. This week’s discussions lead us to realise that the Apprenticeship Scheme was not designed for our sector. We will need to create a hybrid version which is both national and properly funded. We are laying the tracks now. We just need everybody to get on board.
Garry Heath is director general of Libertatem