The FCA has surprised the industry by deciding against decisive intervention in the professional indemnity insurance market.
The regulator had previously suggested it could take tough action in the market after acknowledging that cover was “not working” for IFAs.
The FCA originally asked for opinions on introducing mandatory terms into policies, forcing firms to hold “run-off” cover for longer after they stop trading, or forbidding insurers from introducing particular exclusions or punitive excess payments.
While the watchdog has admitted there are “shortcomings” in the sector, and has proposed a measure that would stop some PI policies from excluded the Financial Services Compensation Scheme when it wants to claim, it has concluded that the costs of firmer intervention could outweigh the benefits.
Director at insurance intermediary Inperio Simon Lovat says he is not surprised at the change in the regulator’s stance.
He says: “There are a lot of the-matic reviews because the FCA wants to understand more, and often the outcome is that the market is broadly performing as it should. I think the regulator has plenty more things to worry about than PI, because it is not performing badly.”
Currently all personal investment firms, including mortgage intermediaries and general insurance intermediaries, are required to have the insurance in place, as well as paying towards the FSCS levy.
PI insurance ensures a consumer can receive compensation, even if a company ceases trading or is unable to pay out, but questions have been raised as to whether PI is paying out enough, or is letting too many claims fall to the FSCS.
Around half of the claims against personal investment firms like advisers relate to large-scale misselling.
While the majority of claims are met by a combination of PI and policy excesses, exclusions to coverage mean that the FSCS still has to pick up the bill on occasion. Last year the scheme paid out £375m in compensation, responding to almost 37,000 claims.
The regulator is concerned that any move to intervene in the market could cause unintended consequences – such as reducing competition and increasing costs – which would negate any benefits.
Its research has shown that some measures the FCA was mulling could have forced premiums up by as much as 300 per cent. While these price increases would take place instantly at the firms’ next renewal date, the reduction of any FSCS levy would take place gradually, likely over a period of seven years. Such a change could severely impact consumers, who may struggle to get advice if advisers are unable to afford appropriate cover.
Speaking at this month’s Personal Finance Society Festival of Financial Planning conference FCA director of policy David Geale said there were also concerns that PI providers could exit the market if the regulator launched an investigation into the sector.
Geale said: “Our concern was that if we made significant changes to our requirements on PI and the mandatory cover, that would very clearly impact on the pricing of insurance.”
Head of IFA practice at insurance broker Protean Risk Julian Brincat says: “If a higher standard of cover became mandatory, either premiums will go up or providers will withdraw from the market. It’s just not worthwhile for them. Insurers deal with lots of professions and type of insurance, they’re not reliant on the IFA market, so there’s little the FCA can do to enforce standard coverage.”
Indeed, this lack of influence over the insurance industry may lie at the heart of the problem for the regulator.
Plan Money director Pete Chadbourn says: “It’s hard to see how the FCA could influence insurers to take on aspects of risk for which they have no appetite.”
And while some have criticised insurance providers for having exclusions in their policies, Brincat says they are understandable. “PI insurers have been in the market for years and have already had to deal with a number of thematic reviews and changing regulation. They have to be wary of future changes and that is predominantly the issue. A review in the future might suddenly invite a number of claims against an IFA and it’s the insurer that has to pay out on that,” he explains.
Brincat adds that if insurers were given more clarity on the future from the FCA and ombudsman they might be less cautious about the exclusions they apply.
Most Pifs are happy with their current insurance policy, the FCA argues. Some 94 per cent of Pifs surveyed by the regulator said there are no products they would like PI to cover which are not generally covered and, on average, firms are either satisfied or very satisfied with their insurance.
Lovat says: “In my experience, markets which are less heavily regulated perform much better than those where regulation is stricter. Markets less strictly regulated tend to find an equilibrium, but tighter regulation can lead to perverse outcomes.”
Some also argue that rather than forcing insurers to pick up the slack, the regulator should use a risk-based approach. Chadborn adds: “I would like to see more financial responsibility being incurred by firms who act irresponsibly or choose to operate in higher risk areas.”
The regulator has made alternative suggestions for improving consumer protection. It has mooted advisers taking out surety bonds or leaving money in trust to cover potential compensation claims even after they cease trading. It has also been suggested that firms advising on higher-risk products could be subject to a risk-based levy.