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.”
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 firstname.lastname@example.org