The redress system for poor investment advice is broken.
Without wanting to dive into the rights and wrongs of the Financial Ombudsman Service (there is no space for that), you need only look at the interaction between professional indemnity cover and the Financial Services Compensation Scheme to see just how ridiculous the current model is.
The FCA says PI insurance is about covering losses arising from professional negligence, so that firms can pay justified claims, and to “prevent insolvency and excessive claims on the FSCS.”
The regulatory definition of what PI cover does and the reality would be laughable, if it was not so tragic.
Advisers are stuck in an endless feedback loop: PI insurer refuses a claim, firm goes bust, passing claims onto the FSCS and eventually higher levies for everyone else. This vicious cycle also serves to create a further hardening of the market for PI, and so the loop continues. You know a market is ineffective when the boss of the FSCS (of all organisations) says it is not fit for purpose.
Everyone knows the model is broken, the question is how to fix it. On the FSCS side, a product levy has been touted, rejected and is now seemingly back on the table – thanks to a group of MPs and some targeted lobbying by Tenet and Apfa.
The recent early day motion tabled on FSCS funding reform even goes so far as to call for a product “whitelist”, though it is not clear how this would work in practice. Would the FCA be responsible for drawing up such an approved products list? And given its track record, do we trust the regulator to do this effectively?
On PI cover, the idea of introducing standard terms offers more promise. This would reduce the prevalence of convenient exclusions and get out clauses the PI insurers are all too keen to deploy.
Beyond wholesale FSCS reform, what advisers really want to see is an effective PI market for all parties concerned – not just the insurers.
Unfortunately, there are a minority of firms who are doing their level best to damage the reputation of the advice profession. To manage this risk properly, we need a more coherent PI market. A more pro-active stance from the regulator to shut down the rogue firms earlier would not go amiss either.