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Lehman clause threat to IFAs

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.”

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. here is another nail in small ifas coffin…!!!!!!!

  2. The Mystery Shopper for IFAs 12th November 2009 at 10:41 am

    FSA asleep on the job again? What happened to their monitoring and approving of Lehman products? Oh yes I remember now, like the monitoring of the banks in 2008. FSA Nowhere to be seen until the horse has bolted again!

  3. So this review on the part of the FSA is “wide-reaching”, is it, as opposed to “thematic”? Why do they always shy away from the correct word which, as we all know, is HINDSIGHT? The answer, of course, is that to do so might highlight the fact that the FSA has provided no regulatory guidance on the points that advisers should highlight when discussing these products with clients. Are hindsight reviews even legal?

  4. Why is it that IFA’s have to give advice, only to be told when there is a problem, what they should have paid heed to at the time – yes hindsight. IFA’s also do not have longstop.
    Just because the complaint is generated in 2009 or 2010, should the insurer at the time of the advice be liable for any complaint? Lets face it, all we should do is change our terms to say that we will not advise on Structured Products, therefore we do not have to accept the complaint any more – oh no, thats possible just for those larger than IFA’s.

  5. Can negligence be proven? Would IFAs actually benefit from instructing a lawyer?

    Bottom line is, did anybody foresee the collapse of Lehmans? Did anybody know that bank was involved?

    If Standard life went belly up would IFAs be found responsible for that too??

    Those of us who avoided ‘structured products’ like the proverbial plague might appear to be sanctimonious now but… I don’t have any worries. No pensions transfers, no FSAVCs, no APPs, no complaints at all. However, we don’t have a crystal ball do we? What horrors lie in wait for the unwary?

  6. Provided your suitability letter included the statement that the protection is not guaranteed and is subject to the underlying companies being solvent at the time of maturity then there should be no case for a claim to be upheld.

  7. I have just come across a case where an investor is taking an IFA to FOS and the IFA is simultaneously taking the PI Broker to FOS for failing to arrange appropriate cover.

    Given that it is the responsibility of the FSA, not IFAs to police those it regulates, I wonder what would happen if IFAs then made their own complaints to the FSA that they were suffering as a result of making a recommendation in good faith, having assumed that the FSA had ensured the provider was complying with its rules and in particular Principle 4 ( and, in particular, Principle 4 (A firm must maintain adequate financial resources.).

  8. Just a reminder that the FSA pulled its only consumer facing facsheet on this subject in April 2008, up until then the wording of the factsheet (which many providers included in the product information issued to clients) clearly stated
    This factsheet is for you if:
    n You are considering investing in a high-income product.
    It explains:
    n the types of products that are ‘high-income’;
    n the risks involved;
    n some points to think about before deciding to invest; and
    n where to get more information.
    Many investment products offer higher rates of return than
    you can get with ordinary savings accounts. The rates can
    look attractive, but take care – your capital (the money you
    put in) could be at risk.
    High-income products can help you improve the amount of
    income you get from your capital – but you need to feel
    comfortable with the risks involved.
    You should read the key features document which will be
    included in the product literature the company sends you.
    This will give you a more detailed explanation of the product.
    “However, like shares, the value of
    bonds can go down as well as up. Their value can also be affected if the company that issued them gets into difficulties. So, when the
    bond matures, or if you want to sell it, you might only get back some or possibly none of your original investment.”
    This is the wording from the FSAs own consumer fact sheet (I copied and pasted it)

  9. Of course it is the very same FSA that obliges IFAs to buy these PI plans!

  10. F-Pack Crack Team 12th November 2009 at 6:20 pm

    I think IFAs and clients should compnai to FOS about the FSA’s mishandling of Lehman and ley the blame at their door!

  11. F-Pack Crack Team 12th November 2009 at 6:21 pm

    I think IFAs and clients should complain to FOS about the FSA’s mishandling of Lehman and ley the blame at their door!

  12. F-Pack Crack Team 12th November 2009 at 6:21 pm

    I think IFAs and clients should complain to FOS about the FSA’s mishandling of Lehman and lay the blame at their door!

  13. I would have been surprised if a PI policy actually covered counterparty risk in the first place as failure of a counterparty i.e. corporate bond issuer is an investment risk.
    What I would be surprised to find would be if the PI insurer has excluded claims for professional negligence where the client has implied counterparty risk was not mentioned to them by the adviser (missold according to the FOS) and a case is then upheld. In those circumstances I would have thought unless the PI insurer had excluded any structured bond sales, it would be a no go and if they had, then arguably the PI broker has arranged a non FSA compliant PI policy for an IFA and it may be the PI bvroker will then have a claim made again them for proffessional negligence as Peter says.
    What a mess……..

  14. Disgruntled Investor 14th November 2009 at 10:10 am

    Our IFA breached FSA rules seven times during the sale process of a NDFA Lehman backed Product to us. This included sending an Investment Suitability letter to us 13 days after the NDFA cooling off period closed and ignoring our written instruction that we were only interested in a SAFE investment. Surely they have been negligent?
    Are the PI companies just excluding Structured Products en bloc? I would have thought that PI was there to protect against negligence.
    Our IFA has been attempting to deceive the FOS on numerous fronts e.g. Producing a investment suitability letter dated almost a month earlier than the original letter and then when caught out, the compliance officer claimed they accidentally sent a draft copy prepared earlier. Our IFA then claimed “We were not inexperienced investors and therefore their Duty of Care should not be the same as that for private investors”. The NDFA investment was our first incursion in to the investment world we were complete novices totally reliant on the IFA’s advice.
    We feel that not only has the IFA been at best negligent but we feel that their subsequent deceitful actions by the compliance officer should be penalised by the IFA. Is this person fit to be a compliance officer?
    Surely PI cover should not be allowed to exclude such behaviour as that is what the cover should be there for.

  15. Disgruntled Investor 14th November 2009 at 11:05 am

    Our IFA breached FSA rules seven times during the sale process of a NDFA Lehman backed Product to us. This included sending an Investment Suitability letter to us 13 days after the NDFA cooling off period closed and ignoring our written instruction that we were only interested in a SAFE investment. Also the Investment Suitability Letter specifically stated that our capital was 100% guaranteed to be returned to us and that we the investors were covered by the FSCS. Surely they have been negligent?
    Are the PI companies just excluding Structured Products en bloc? I would have thought that PI was there to protect against negligence.
    Our IFA has been attempting to deceive the FOS on numerous fronts e.g. Producing a investment suitability letter dated almost a month earlier than the original letter and then when caught out, the compliance officer claimed they accidentally sent a draft copy prepared earlier. Our IFA then claimed “We were not inexperienced investors and therefore their Duty of Care should not be the same as that for private investors”. The NDFA investment was our first incursion in to the investment world in our sixty Six years we were complete novices totally reliant on the IFA’s advice.
    We feel that not only has the IFA been at best negligent but we feel that their subsequent deceitful actions by the compliance officer should be penalised by the FSA. Is the IFA who sold the product a fit person? Is the companies compliance officer a fit person to carry out compliance duties?
    Surely PI cover should not be allowed to exclude such behaviour as individual negligence that is what the cover should be there for.

  16. This will remove more IFAs than RDR will. Unless you succesfully notified your insurer at the time of Lehman’s collapse and before your next renewal (after the no-Lehman’s clause went into your policy) then you have no cover.

    Your clients WILL complain, because the FSA will tell them to, ambulance chasers will tell them to and the press will tell them to.

    You might like to ask your Broker why they recommended a policy which excluded the very circumstances you sought to cover – like a ‘no driving’ clause in a motor insurance. It is ridiculous. Take this issue VERY seriously. I have not written any open letter since 1994 but this has stirred me from my slumber. You have been warned.

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