Advisers have been warned they could have multi-million-pound exposure to Lehman-backed structured product claims due to exclusions in professional indemnity insurance policies.
Regulatory Legal partner Gareth Fatchett, who is advising IFAs on structured exposure, says the bulk of policies he has seen include an exclusion relating to insolvency of the underlying counterparty or provider which could give rise to uninsured claims.
The FSA has launched a wide-reaching review of the structured product market after uncovering significant advice failings. It is instructing firms to review past sales of Lehman-backed plans and is writing to Lehman-plan investors with complaint guidance. Fatchett believes this could trigger a large number of claims and advisers may not be covered.
He says: “The FSA notice on structured products creates an iceberg which many firms will not see until it is too late. Many firms do not understand the holes in their PI policies.”
Fatchett says the exclusion clauses started to appear in early 2009 and elements of risk relating to structured products have been excluded from cover at renewal by several insurers. He is forming a structured product group to help firms assess their PI cover and review past business.
PI insurer QBE European Operations says its basic policy features such an exclusion but it also writes custom policies with no exclusion.
A spokesman for PI insurer RSA says: “We do not apply a blanket structured products exclusion. For some policies, however, we do exclude elements of risk relating to this, for example, failed counterparties.”
Collegiate Management Services legal director Martin Archer says, of the 10 firms underwriting most of this business, around five have exclusions. “There are some quite nasty exclusions which will leave IFAs horribly exposed following the FSA’s action on Lehman,” he says.
PYV managing director Ian Boscoe says: “The majority of wordings from insurers do exclude insolvency. However, insolvency exclusion clauses are significant in instances where it is determined the intermediary has been negligent in dealing with their client. So far, I have not seen instances where negligence has been proven.”