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FSCS chief: PI cover is not fit for purpose

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Financial Services Compensation Scheme chief executive Mark Neale has hit out at advisers’ professional indemnity insurance as being unfit for purpose and called on PI insurers to reveal how they decide what premiums to charge.

Speaking at our flagship Money Marketing Interactive adviser conference in London last week, Neale criticised the way the current PI model for advisers works in practice.

He said: “PI cover is an interesting issue and one we have flagged repeatedly because many of the firms that come to us do so because their professional indemnity insurance is not fit for purpose. I would be up for understanding how PI insurers make their own judgements about the premium they charge advisers.”

The Financial Advice Market Review recommended the FCA carry out a review of the availability of PI cover for smaller advice firms once it has completed its review into the FSCS funding model, which is underway.

Neale added: “A bigger problem is the lack of fitness for purpose of many PI policies so firms can’t absorb the liabilities that come to them. That tips them into insolvency and they become a charge on us and all of you [advisers].”

He says one way of incorporating risk into the FSCS levy model would be to examine PI insurance.

A product levy has already been ruled out as a potential funding model for the FSCS but risk-based and “smoothing mechanism” approaches were raised as two potential solutions at an industry roundtable last week.

Money Marketing understands adviser trade body Libertatem is partnering with broker Lockton to provide a PI facility for its members.

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Comments

There are 14 comments at the moment, we would lover to hear your opinion too.

  1. The answer is called a product levy….

    Insurers have to try to assess risks which at this point in time are not a risk, are not considered as a risk, or unlikely to be a risk or indeed could be a risk, cover their costs and make a profit. They also can’t second guess either the vagaries of the market or the regulator or Ombudsman (and possibly the courts) so what does Mr Neale really expect? Let’s also throw in systemic risk – market collapse which creates losses and signals a rise in complaints, a property market bubble bursting and losses encouraging complaints and so it goes on.

    As life progresses sadly it seems that the ‘outcomes’ suggest more and more that advisers/product providers, etc are indemnifying clients against decisions which they also take, as customer awareness and sharing of the process of advice and the responsibility for it are becoming history…. this increases the likelihood of ‘risk’ to the insured, the adviser and so what is expected of PI cover and premia?

  2. If ever a class of insurance complied with Katz’s first law of insurance PI is the best example.
    “We will charge you the largest premium possible and will fight like mad to avoid any claims”

  3. One has to questions why a product levy was rejected?

    The excuse that it would require a change in legislation is a bit lame.

    Government’s are quite happy to change legislation when it suits them.

  4. “A product levy has already been ruled out as a potential funding model for the FSCS” but there doesn’t seem to be a definitive reason why it has been ruled out. Who makes these arbitrary decisions?

  5. Gosh, I don’t know what has happened but I find myself agreeing with the FSCS on this issue! PI is a joke. I continue to provide my plain vanilla advice to clients with mostly modest means in areas that are extremely ‘unlikely’ to ever result in a future claim and if there was an issue, guess what, the ‘policy excess’ for the category of business would almost certainly fully cover the risk to the PI provider. My exorbitant PI premiums seem to be another brake on my business profits for no obvious benefit and as they are compulsory they feel more like taxation. Basically it feels like I’ve been paying PI premiums for 25 years simply to protect ‘others’ who sell questionable ‘sophisticated’ products at my expense.

    My short term support for the FSCS rapidly falls away though on the fact that a Product Levy has been simply discounted. So it requires a change in legislation – then for goodness sake make that change. Oh sorry you don’t have to, because you can simply tax the rest of the adviser community and we have no choice but to pay if we wish to continue trading. Simples.

  6. O3 insurance solitons 2nd June 2016 at 12:31 pm

    Advisor firms need and deserve clarity and transparency when it comes to PI insurance . Not being fit for purpose being coupled with premium charging is not the real comparable , the comparable is pricing and policy coverage . The regulator needs to introduce a minimum standard policy wording so that firms understand the coverage , currently insurers are free to incorporate any exclusions they wish. This is the main issue the FSCS mean by ” not being fit for purpose” !!

  7. Why don’t YOU, the FSCS take up the mantle. We pay you what we pay the insurer, thus covering the excess (which would make us happy), and you’re covered for any liability that may come your way. If you take the fact that claims are made long after the event you should have stock piled a fair amount to make a tidy profit should the advice company have gone under. I am sure the insurers make a tidy profit, therefore so should you!! Stop bleating and do something!! All you and the FCA do is have meetings at our expense and usually come up with flawed plans anyway.

  8. Steven Pearman 2nd June 2016 at 12:54 pm

    Mr Neale seems to share my wife’s view that there is a money tree that everyone can go and top up at as and when they want.

  9. Julian Stevens 2nd June 2016 at 5:21 pm

    All this started with the (retrospective) Pensions Review of 20 years ago, did it not? And, despite Howard Davies having expressed his opinion that regulation by hindsight is “not helpful” (an understatement if ever), the FSA has been doing it ever since in an attempt to disguise the fact that it wasn’t on the ball at the time and has been caught with its pants down (if you’ll forgive me for mixing my metaphors).

    It’s hardly surprising then that in the wake of the pasting inflicted on them as a result of the first one, at the first whiff of yet another hindsight review, PI insurers withdraw cover at the earliest possible opportunity. Unless a complaint about some item of defective advice hits you in the same policy year as that advice was given and/or you’re paying further premiums for run-off cover (the scope of which will probably be severely restricted), insurers have no scruples whatsoever about leaving you up the proverbial creek without a paddle, despite the fact that you’ll have already paid handsomely for said paddle.

    This ghastly state of affairs is compounded by the FSA’s persistent failure even to establish whether or not firms have in place proper PI cover for everything on which they’re advising, even at the time that they’re giving that advice.

    So who is responsible for the increasingly impossible PII market and rocketing FSCS levies with which regulated firms are struggling to cope? An incompetent and unaccountable regulator.

  10. Mr Neale is fiddling while Rome burns. The FCA, FOS & FSCS need to get their heads together and come up with common standards instead of each having their own (and an assumption that the customer is always right).

    A risk-related product levy is the only sensible answer. That in itself might deter some investors from taking too much risk yet accepting all the potential up-side risk but blaming the adviser for all the down-side risk.

  11. If “passing the buck” was a Olympic sport….. Mr Neale would be a gold medal winner

    And its a bit rich of him, to state who or who is not “fit for purpose”….. take a long look in the mirror Mr Neale; that’s if you dare look yourself in the eye ?

  12. If I had my time again I’d set up a PI company. Charge everyone a fortune for my cover and boot them out after a while. If anyone ever tries to claim I’ll point to an exclusion I am now applying. Never again will I have to worry about what the FCA or FSCS think.

  13. @Nick

    I see you subscribe to my first law of insurance!

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