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Nic Cicutti: FCA needs to admit its PI mistakes

Nic Cicutti

Back in the days when millions of people actually bothered to buy daily newspapers, Kelvin MacKenzie, then editor of The Sun, had a phrase for his tabloid paper’s sudden reversals in editorial line on any given issue.

“Reverse ferret” was MacKenzie’s chosen expression for these 180-degree handbrake turns. It came from his stated belief that the role of journalists at the Current Bun was to “stick a ferret up the trousers” of public figures they might be monstering at the time.

Of course, if the tide of opinion started running massively against the paper’s line, MacKenzie would burst out of his office and shout “reverse ferret!” at his astonished scribes. This would lead to a complete U-turn in what they had previously asserted to be the “truth” – usually without even a token nod towards the paper’s previous position.

I found myself thinking of Kelvin MacKenzie the other day, as I worked my way through the FCA’s recent consultation document on how to reform the professional indemnity market.

The first thing to point out is the consultation marks a complete “reverse ferret” moment when compared to a decade-long policy by the FCA and its regulatory predecessor, the FSA, in respect of Financial Services Compensation Scheme contributions and PI cover.

I distinctly recall how in the early noughties, when faced by a PI crisis in which the cost of cover climbed to impossible levels, the regulator deliberately relaxed the wording of professional indemnity requirements to allow cheaper policies to trickle through to the market.

The then FSA managing director David Kenmir, now a senior honcho at financial services firm PwC, said the proposals would “help us all to resolve the problems IFAs are experiencing.”

I argued at the time there were serious structural issues that were not being addressed by the FSA’s proposals.

“The FSA’s new consultation document will, in my view, have two parallel effects. First, while some IFAs will be able to get cover – still expensive, but never mind – the actual value of that protection will be minimal, both for them and consumers,” I wrote.

“In practice, they won’t be able to meet serious claims against them and will go to the wall. So the second parallel result will be many more claims to the FSCS that will, on the basis of past evidence, take months before payouts are finally agreed and paid out. And who pays for compensation paid via the FSCS? It’s the IFAs, of course, as well as the rest of the industry.”

“The consultation marks a complete “reverse ferret” moment when compared to a decade-long policy by the FCA and its regulatory predecessor.”

About turn

Fast forward a dozen years and on to the latest consultation. First things first: the idea of risk-based levies, where advisers’ FSCS levies “better reflect the risks of specific practices, particularly on firms distributing higher risk products” is a clear winner, as is the regulator’s move to start collecting data to determine the extent of individual firms’ appetite for riskier products.

The option of amending funding classes to smooth costs for most advisers has merit. The danger would be if, in the process of grouping together advisers involved in investment, life and pensions, home finance and general insurance, you risk pushing up costs the most risk-averse intermediaries, for example those in the B2 class who have stuck to a limited palette of direct lines advice provision.

I also have some reservations about the introduction of product provider contributions to help pay the costs of claims when adviser firms fail. It is true that in recent years several of the biggest FSCS levies have been caused by a blurring of the distinction between “providers” and “intermediaries”, such the case of Arch cru leaving advisers to pick up the tab.

It is also true that product providers are centrally involved in the distribution process, alongside advisers, particularly in the case of riskier products. My worry would be if some advisers start treating a providers’ contribution as a “get-out-jail card”, or at least a “reduced sentence card”.

Key to the FSCS funding reforms being successful is the parallel effect of reforms to indemnity cover provision. It is good the FCA review finally acknowledges that “not all PII policies respond adequately to claims made on them.”

In particular, the fact that some policies exclude claim when firms become insolvent or refuse claims made on them by the FSCS means they are barely worth the paper they are written on.

Addressing this by enforcing standard wording for policies and extending the level of cover required from advisers, will unquestionably raise the overall cost of PI cover. The alternative, however, would be to maintain a variant of the current system where the cost of compensating investors is offloaded onto the FSCS and the principle of “polluter pays” has no real meaning.

Ultimately, the latest proposals mark the opening of a useful discussion as to how to reform both PI cover and the long-standing FSCS funding crisis. It is a pity there is not even a scintilla of acknowledgement by the FCA that it is its past policies, deliberately engineered to have precisely this effect, that have led the industry into this mess.

Maybe this does not matter so much: the end result is what counts. But it would have been good if the FCA’s approach contained a little more acknowledgement of past mistakes and a little less “reverse ferret”.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. I’ve been calling for months for the FCA to own up to its own failings as far as PII cover is concerned, not least its failure to ensure that the policies of firms selling high risk junk actually covered those activities.

  2. Nicholas Pleasure 26th January 2017 at 1:52 pm

    Interesting piece. The first thing the FCA needs to do is to bring FOS into line so that it’s judgements align with standard UK law. This also means that companies should have the right to appeal decisions. This alone would instantly reduce the cost of PII because the underwriters would be dealing in a slightly more certain world.

    Secondly, the FCA needs to promise that it will do no more retrospective reviews of past business. It is perfectly acceptable to look at the past and devise new rules and practices to improve the future. It’s when those rules and practices are then applied retrospectively that it costs advisers and PII firms money.

    The FCA also needs to be flexible with its capital adequacy requirements. It must be acceptable in the event of a PII claim for the excess to be met from CA with a requirement to rebuild CA over, say, six months. Without this the CA requirements simply mean that firms go bust more quickly. The breach CA, lose authorisation and hence their income and fall over. Great news for the PII insurer as the claims then fall on the FSCS.

    Essentially the FCA is now reaping the results of not listening in the past. It thought that the industry had a bottomless pit of free money that it could dole out to anyone. This resulted in the FCA, FOS and FSCS acting as consumer champion when they really should have acted as the police and courts, ensuring that everyone was obeying the law.

    Make a few reforms as above and the cost of PII might fall. If you just tighten the PII wording you will increase the cost of PII and hence the cost of financial advice. You will also lose more advisers. Some commercial reality is now needed.

    • Were the FCA to end hindsight (oops, sorry, thematic) reviews, those who’d dispensed what is later considered by a client (and perhaps confirmed by the FOS) to have been defective advice could simply (and with some justification) excuse themselves by proving that they’d followed all the required procedures laid down at the time by the FCA. This would then throw the spotlight uncomfortably on the FCA for not having drafted the relevant rules sufficiently thoroughly at the time and it would never do anything to invite that.

      Also, the FCA can (and will) always fall back on the handy catch-all of suitability (or lack of it) which has been a fundamental principle of the advice process since time immemorial.

      So, even though Howard Davies many years ago stated publicly that hindsight reviews “are not helpful” the chances of the FCA stopping doing them are remote in the extreme.

  3. Custard is laughing his head off at rhubarb barking up the wrong tree !
    The past can teach us so much, and it serves no real benefit to the industry and more importantly to the consumer, to regulate then de-regulate as with PI to relax the the wording then tighten them up it is the true definition of a vicious circle.

    Like the yo-yo on the string its either at the top or at the bottom traveling through and then past the very place it needs to be…..

    Scrap PI and equitable fund the FSCS ! create a symmetry across the FCA, FOS and the FSCS between the three they have all the data (and more) to set premiums across the 4 parallels of, turnover, complaints, risk product and liquidity, and enforcement.

  4. All good ideas here however I fear that (like every bit of regulatory reform before it) this will be a dogs dinner from the end user’s perspective). Mandating specific wording will tighten up on PI providers being able to wriggle out of claims but will lead to reduced participants in the market and hugely inflated prices. This is not the FCA’s concern. They want to (admirably) try to reduce the burden on the FSCS in terms of funding – first and foremost. That can only be done by stain so much falling to the FSCS. This in turn can only be done by reducing the number of PI claims being declined, which can only come about as a result of more appropriate PI. Guess what? That kind of cover will be hugely expensive.

  5. I have summoned the medics. I have found a Nic article I agree with!

    The problem lies with FOS and its decisions which are often divorced from the normal tenets of civil law in terms of limitations, evidence and process.

    The idea of FOS was to resolve disputes without course to civil law but in line with its procedures just as all other Ombudspersons do for their particular professions. This maintains PI cover and the confidence of its insurers.

    The way FOS acts has turned dispute resolution into a lottery to which the PI insurers are expected to buy a ticket. It has also encouraged the growth of a convoy of ambulance chasers who will soon be losing the PPI gravy train on which they have been feasting for a decade.

    The 3 Fs cannot have their bun and their ha’penny. Either we have FOS acting as a proper Ombudsman within Civil Law boundaries or we lose PI cover and with it probably with Professional advice.

    The 3fs and their political masters want to maintain the maximum latitude in settling claims , particularly those that get “political”. The unaccountability of the regime to Parliament and the accountability of the component parts with each other allows this to happen.

    This ferret has travelling in the same direction since 1995 and the Pensions Review. Either the ferret reverses or professional advisers must escape to their own regulator and Ombudsman which would have to run along professional lines

  6. Garry – couldn’t agree more. Just this minute had a FOS “investigator” ruling. Provider delays in transferring funds to new provider. FOS agrees they should have been transferred to the new provider on 16 June (not 2 August as was the case) – and feels that the £300 interest offered by the provider is acceptable and in a similar vein to what FOS would have offered. Totally ignores two issues: a) The client has lost out on Stockmarket growth – had the funds been transferred in June the client would have benefited from over £4k growth in the new plan and b) the original provider used the June unit prices and transfer value, circa £38,700. This is what they transferred to the new provider in August, however, they confirmed the transfer value was £42,300 in August and this is the amount the fund was encashed for – they’ve trousered the difference! FOS appear to either find this acceptable or have missed the point. Needless to say I’ve asked for referral to an Ombudsman.

  7. Gaynor: The biggest question in regulation is do the 3Fs exist to protect the consumer?
    If so how did they so spectacularly fail Connaught’s clients, LIBOR, exchange rates and all points south.

    Or are they there to protect the powerful. HSBC HBOS Equitable life etc

  8. Sed quis custodiet ipsos custodes?

  9. Sed quis custodiet ipsos custodes? Well I try

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