The FSA tells us that over the period between June and September, 72 per cent of intermediaries applying for professional indemnity insurance were able to get the cover they required. Great. So no problem then.
I wonder what their reaction would be if over one in four of the FSA staff were told that they would have to find another job, not because they were bad at the job, not because there had been a reduction in the workload, but simply because the regulations required it.
Sadly, it seems to me that the FSA are providing yet another version of Nero's violin performance. Unfortunately, their rendition is hardly music to the ears of IFAs among the flames.
I confess that I am no expert on the inner workings of the PI industry but I would not have thought that any of the regulator's proposals would lead to a rush of providers into the market. Indeed, I believe that there is little that anyone can do to reverse the trend which is affecting many industries and is actually an international problem.
I feel that the FSA should have looked at the problem in the wider context and asked themselves why it insists on PI in the first place. I believe that if it did it may well have felt that the best way forward would be to scrap the requirement all together.
Please don't get me wrong. I would like to have PI cover. I started my business when regulation was just a gleam in a civil servant's eye. PI cover was not compulsory but I felt that it was a sensible business precaution to have that protection in place. But times have changed. PI no longer protects our businesses but endangers our viability.
The FSA's primary task is to protect the consumer which is quite right and proper. One way that it feels that it can achieve this is to insist on PI cover that protects the business and therefore the consumer in the event of a big claim. Until a couple of years ago this made great sense. Then we saw the very large increases in premiums and the associated reduction in supply. That was tough but bearable. Now we are seeing a huge increase in excesses. In Consultation Paper 193 the FSA refers to excesses of £5,000, but these days an excess of £10,000 or more is not uncommon. We all know that claims of an amount bigger than this are extremely rare. So we are faced with a situation where insurance costs have risen sharply and where it is most unlikely that we will ever be able to claim on that insurance.
So costs have risen at a time when business is tight. As a result PI is increasing the chances of an IFA going bust, with the consequent problems for their clients, yet there is very little chance of PI cover being of any use to the firm and therefore the consumer.
If the firm does go bust the compensation scheme will of course stand behind the clients. So surely this is the way we should go anyway. The FSA should consider taking the bold step of removing the PI requirement. This would release more money for the firm to meet any claim. If it is unable to do so the firm will go bust and the compensation scheme will come into play to protect the customer. Certainly this will mean larger compensation scheme charges, but this is likely to be less than the PI costs we are paying now.
In addition the FSA could come up with a requirement for firms to put aside the money saved on PI premiums for a number of years to build up a pot out of which claims could be paid. In the meantime the compensation scheme could take the strain as above.
In paragraph 4.7 of paper 193 the FSA refers to a sinking fund solution as suggested by some in the industry as part of its initial consultations. Its comment seems to be lukewarm to say the least, but I really do believe that this could be a realistic alternative as I have suggested in the paragraph above. I really do hope that the FSA have a broader look at the how PI is now providing a risk to the consumer rather than a protection.
In any event, the current proposals are of very little help. Last Christmas I spoke about PI at our members meeting. I mentioned that the Authorities were looking at the problem, but said that I wouldn't hold may breath. Sadly the FSA have proved me correct.
Kean Seager is chairman of the Whitechurch Network