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