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IFAs waivering in the PI storm

IFAs are facing a dilemma as the pace of developments escalates in the professional indemnity crisis.

In just the last two weeks, Money Marketing has reported details of two proposals for captive or mutual PI insurers in the offing. While neither has yet come to market or sought authorisation, the idea they are being actively pursued is an encouraging sign.

Aifa director general Paul Smee says: “I think the fact they seem to be emerging at the rate of one a week at the moment suggest that at some stage gold will be struck. There is evidently a degree of commercial interest in the idea of a captive insurer but I would want to see more details before I endorsed any captive.”

Neither of the schemes proposed, one to be based from Gibraltar and the other in the Isle of Man, is suggesting an open-door policy to risk. They are adamant that IFAs will have to meet strict criteria or undergo due diligence to be considered to get cover. The premiums, they say, would not be exceptionally low but at least they would be available.

Last Tuesday, the FSA succumbed to pleas from the industry and scrapped the obligation upon firms to tell clients if they were operating with non-compliant cover or,in regulatory parlance, individual guidance. While this will not do anything to create more capacity in the market, it may stop further erosion of confidence in an already stricken market.

Perhaps most significantly in the short term, the FSA has granted its second year-long PI waiver for an IFA – this time to sole trader Belbury Financial Services in Reading.

It must be viewed as a positive development that the regulator is willing to give a break not only to big, well capitalised firms but also to the one-person bands.

Smee says: “Firms would have to put together a decent case and demonstrate they have the resources and the capital necessary to be granted a waiver. But I think there a reasonable number who are in the position to do so.”

The first waiver was granted at the end of January to The Falcon Group, which has 105 RIs, £10m annual turnover and £939,000 in capital resources.

Syndaxi Financial Planning principal Robert Reid says: “I would think that a lot of the smaller firms have been thinking these waivers only for the big boys. This may motivate them to apply themselves.”

But IFAs should be aware of the requirements to be considered for exemption.

FSA head of investment firms David Kenmir says: “Any firm has the right to apply for a waiver at any time. Because they have not applied in the past I think we assumed that they did not want to but maybe they have just been afraid to ask.”

Geoffrey Poland is the sole trader of Belbury Financial Services but his circumstances may not mirror those of the average solo IFA. By all accounts, he has substantial capital which he is putting forward to offset the need for PI.

The waiver document on the FSA&#39s website outlining his case has replaced the need to have a minimum of £10,000 in capital reserves with which all IFAs must comply with instead an obligation to have the greater of 15 per cent in annual turnover or £160,000 in reserves.

The FSA says this is the trade-off it requires but one wonders how many small IFAs have that kind of money at their disposal, especially in the current climate. Many IFAs would much rather have affordable, compliant cover rather than a waiver.

Sofa chairman and Infor-med Choice managing director Nick Bamford says: “If you were a sole trader, would you want to trade without PI insurance? You are putting your family home and all your other assets at risk by the very nature of not having cover.”

But many IFAs face the choice of operating without cover or going out of business.

LIA head of public affairs John Ellis says: “Most IFAs would prefer to have affordable compliant cover but many face a situation where they cannot get any cover at all. It is particularly this group who are in need of a waiver because they are facing going out of business.”

Some firms now have the choice of going for a waiver or being forced to join a network. Many smaller IFAs are proud of their independence and view joining a network as to surrendering this freedom.

Kenmir says: “Some people throw their hands up in horror at being told they could always join a network and say I would never do that.”

IFA Bucklands partner Andrew Burnett says his firm has not had any problems getting PI cover because he is attached to a bigger general insurance operation but he thinks smaller IFAs may have no choice but to seek a waiver or join a network.

He says: “If smaller IFAs want to carry on as they are, they may have no choice but to seek out a waiver. The only other option may be to join a network. The issue of PI is almost a catalyst for small IFAs making them reconsider their future.”

The FSA says it has received 20 applications from smaller IFA firms for a PI waiver. Industry sentiment is that the regulator must decide their fates quickly to send a positive signal to the market but most believe waivers are only a short-term solution to the PI crisis.

The regulator must realise that the majority of IFAs would prefer to have a functioning PI market rather than regulatory exemptions which make them put up personal assets up as a guarantee.

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