View more on these topics

Legal view: FSA must stop treating PI as a cash cow

Harriet Quiney MM blog

Historically, the FSA has seemed to regard professional indemnity insurance as a cash cow which exists to compensate misselling claims.

While the tide may be turning slowly, the FSA’s 2010 Insurance Sector Digest exhorting insurers to focus on profitable underwriting, this digest was not PII focused and recent developments surrounding Arch cru suggest that the cash cow vision may still hold sway. In particular, on 12 July, the FSA sent a “Dear CEO” letter to a number of insurers who provide PII to financial advisers expressing concern that insurers might seek to exclude Arch cru claims from future cover and that this could result in firms needing to hold additional capital.

Clearly, the FSA cannot have it both ways. Histrionic and sweeping statements such as Margaret Cole’s comment that “traded life policy investments are toxic products which pose significant risks for retail investors” are bound to increase consumer anxiety and clear a path for claims management companies to charge down.

Adding to the mix the FSCS’s readiness to sue large numbers of advisers, whether or not investor customers consider them to blame for their losses, and a potential s404 scheme, which does not require complaints for compensation to become payable, will only serve to increase insurer concern, inevitably leading to more stringent underwriting, higher premiums and narrower cover.

Unsurprisingly, a number of prominent insurers have recently ceased writing PII for financial advisers, all citing a lack of profitability.

A combination of the concerns set out above and reduced capacity caused by a smaller market is already beginning to claim victims. The clearest example of this is Honister Capital, the press release announcing its closure stating that PPI costs had increased to unsustainable levels, driven by large claims relating to historic business and, to a lesser extent, wider industry issues and that this had a material impact on regulatory capital requirements and the company’s ability to trade.

So what can the FSA do?

In the first instance, where an investment loss is less than £150,000 and the firm is not in default, the FSA could leave complaint handling to advisers and the Financial Ombudsman Service. From a consumer perspective, the FOS is trusted, simple to use and recognised by over 75 per cent of adults. It is clearly well equipped and sufficiently funded to deal with consumer complaints and, while not universally popular in the adviser community, must be better than a s404 scheme which could force financial advisers to compensate satisfied customers and/or those who have not been mis-sold alongside those who have received poor quality advice.

Second, the FSA could stop using meaningless, fear-inducing phrases such as “toxic” to describe failed products. If a product is high risk, then in most situations this should be self-evident and the product should carry sufficient and appropriate warnings rather than being sold using statements such as “a lower risk profile and a higher level of income allows you to receive the income you need without the worry of stock market falls”.

If the risk level of the product is not self-evident or the risk level is inflated because the provider does not operate the product in the intended manner, then it is not clear that this is the responsibility of the adviser and the FSA should consider shouldering some of the responsibility itself.

Finally, we do not live in a “no fail” world. While consumers should be compensated for poor or misleading advice, the public must be educated to understand risk and that if something looks too good to be true, it probably is.

Harriet Quiney is partner at Fishburns LLP

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. well “If the risk level of the product is not self-evident or the risk level is inflated because the provider does not operate the product in the intended manner, then it is not clear that this is the responsibility of the adviser ”
    so if its not the adviser’s fault that the product is mis-labellled or mis administered whose it it? the man in the moon’s?

  2. It`s not just PI, it`s finacial advisors and product providers and banks it`s a veritable herd of cash cows. What a great industry to be part of and where in just a few years time someone in authority will look round and say “what happened, where has everyone gone?” Regulation? No Strangulation!

  3. I met a client recently who openly admitted they had made a compensation claim a few years back for a miss-sold mortgage endowment plan. They said they had discussed the risks with the adviser and fully understood when interest rates dropped they should keep the mortgage payment at the same level to ensure the mortgage was repaid at the end of the term but of course they ignored this and just spent the money. They also admitted knowing there might be a shortfall if investment performance was poor. I asked them if they knew this why they made a claim. “Because everybody is doing it and you’ll get compensation” was their answer. How can an adviser really defend himself against these types of people who are prepared to lie? Don’t say ‘fact find’ or ‘suitability reports’ because these types of people will just keep on lying and say they weren’t issued or weren’t discussed properly. The PI insurers aren’t stupid they know the game is stacked against them and why would any sensible business writing PI cover continue to write insurance to cover the claims culture that has been allowed to prosper under the FSA and FOS if they know it’s impossible to make a profit from doing so?

  4. “From a consumer perspective, the FOS is trusted, simple to use and recognised by over 75 per cent of adults. It is clearly well equipped and sufficiently funded to deal with consumer complaints and, while not universally popular in the adviser community, must be better than a s404 scheme which could force financial advisers to compensate satisfied customers and/or those who have not been mis-sold alongside those who have received poor quality advice.”

    While this view may be the consumers view, I can assure all concerned that my faith in the FOS as an impartial service has sadly declined due to referral of 3 no brainer clear and compelling complaints about mis sold mortgages to consumers who used the funds to invest in the now much maligned Integrity GTEP maximiser plans.

    None of the mortgage complaints referred to were compliant and performed so much in breach of MCOB rules, as to amount to virtual fraudulent conduct, yet this did not seem to matter the FOS, who sided with the network responsible in all cases, even though cogent and compelling evidence was provided of totally unsuitable advice.

    I personally don’t know what the answers to this industry’s problems are, the FSA do not have the answers, their actions to date are quite clearly detrimental on all counts to a transaction based IFA system, regardless of protestations to the contrary, the RDR and other associated issues such as the commission ban, seem specifically designed to close down or render irrelevant, the IFA sector, one of the least complained about and most active vibrant sectors of our industry.

    The next 12 months will see many more networks go tothe wall with the associated manure attached.

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com