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Has the FCA gone far enough to tackle PI problems?

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.

In a further consultation at the end of last month, however, in an apparent change of heart, the regulator said the PII industry “broadly works well”.

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.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. My take on this for what is worth is as fallows.

    FSA says it is not good enough, standard answer to all questions these days. Starts to look at the issues and relies its partly their regulations causing the issues. The lack of clarity and rules as they only offer guidance is the major problem for PI companies and advisers. They then back track, stating all is fine, as to state otherwise would mean them having to set rules, define actual requirements to give the PI companies and advisers clarity and certainty.

    I would like the regulator to explain how any business can with any certainty, know they have actually adhered to their guidance? Until this can be achieved, no PI company or adviser can access the risks with any meaningful outcome.

  2. This is what happens when you try to take on commercial organisations, they either agree or walk away.

    The only real solution is the elephant in the room… regulatory proactivity in preventing bad stuff being flogged to folk!!

    • Not long ago, Mr Geale was quoted as having said that the FCA isn’t too bothered about FA’s advising on some types of business that aren’t covered by their PII policy. If true/accurate, such a laissez faire stance seems to be extraordinarily irresponsible, not least because it’ll do nothing to stem the ever rising tide of uninsured liabilities falling on the rest of us by way of the FSCS which, so we’re told, the FCA, is keen to address. If firms are required to hold PII as a condition of authorisation, where is the logic in allowing them to have policies which don’t cover ALL their activities?

      The FCA has also been quoted as having said that it plans to extend the scope of its GABRIEL requirements to advice data on high risk, specifically unregulated investments though, as far as I’m aware, what it hasn’t said is what it plans to do with such data. One might reasonably expect that its first response should be to require that any firms reporting such activities must provide proof of relevant PII cover. If it doesn’t, what’s the point?

      As for the claim that the PII market “broadly works well”, the large number of posts on forums such as this strongly suggest a widespread perception that it certainly doesn’t. For a start, insurers commonly withdraw at the earliest possible opportunity cover in respect of any area on which there’s been the first whiff of another hindsight review on the part of the FCA. And who can blame them? They know that what’s likely to be coming down the pike are a whole slew of judgements on yesterday’s business based on today’s standards. With CMC’s sharpening their knives for the next round of assisted/concocted complaints, the problems looming for firms who’ve been active in the DB transfer market hardly bear thinking about. The principals of such firms must already be having sleepless nights.

      As for run-off cover, apart from anecdotal evidence indicating that this is both difficult to obtain and very expensive, what if any protection do retired FA’s have against insurers arbitrarily withdrawing from this market? I’d bet good money (well, in view of the odds, I wouldn’t actually) that they’ll very probably refuse to renew in the wake of the very first claim and, from that point on, no other insurer will be prepared to touch the risk, at least not without massively hiking an already steep premium. Where there’s been one claim, others will probably follow.

      I spoke to a DA colleague on this subject a couple of years back and he told me that the application form just to renew his existing policy with the same insurer was 32 pages long ~ just to renew, not obtain quotes from a selection of possible alternative insurers, each of which probably have their own questionnaire at least 32 pages long, maybe twice that.

      It all comes back to the need for the regulator to get its act together (what hope of THAT we wonder?) by way of a decisive and effective strategy to identify and home in on the relative minority of firms causing most of the problems in the PII market and with the ever-increasing demands on the FSCS.

  3. I dont really think “Far” is the right word … “can’t” is more appropriate

    Reading between the lines I think its more of a case of….look you (FCA) impose sanctions or mandatory wording we PI providers will just walk away or make cover so expensive it would make the Sultan of Brunei blink twice and sit down.

    So much like everything else, we all just go around in a big circle, only to arrive at the place we all started, a lot poorer and none the wiser.

  4. To be fair to the FCA they were prepared to undertake some proper research into the PI market and approached (some of) the right practioners in doing so. My sense was they began with a pre-determined idea of what the market was, how it operated and what they would do to ‘correct it’.
    Once they realised the reality was very different and indeed, those insurers remaining in the market only do so out of a sense of professional duty/pride and the reason the PI market continued was only due to a few individual underwriters (and it is down to individuals – make no mistake) making a case to their corporate masters.

    No exaggeration, had the FCA mandated a minimum basis of PI cover it would have meant the overnight withdrawal of what remains of the PI market. No insurer has made money in this sector…. for years and if that surprises you, it really shouldn’t.

    There exist two fundamental obstacles to more entrants writing PI for IFAs (and thereby generating much needed competition):

    1. FOS decisions -frequently illogical and having no reference to legal principal or natural justice.
    2. Many IFAs are simply not very good taking preventative measures in the face of 1. above. Nor are they particularly adept at presenting their business for scrutiny by insurers.

    Problem 1. can only be solved by lobbying government. FOS has introduced a cataclysmic uncertainty to the mix and if there’s one thing insurers hate it’s unpredictability. Add a fundamentalist application of the dictum that “the customer is always right” and FOS will make sure either the insurer (that rapacious bunch) or the IFA (needs a good smack to show the other naughty boys) who pays the poor innocent punter who needs saving from themselves. The mindset is that “we get a positive press release and someone else’s money pays the bill”. Thinking typical of public servants and bureaucrats.

    Problem 2. is down to IFAs and here I have experience – the majority simply have no idea how to present themselves positively as a risk – either because they can’t be bothered (then don’t moan if you can’t get a half-decent quote) or because they don’t capture the information required to provide a coherent and viable submission – in which case why not ??

    My sense is that many IFAs view their PI as they do the FSCS levy – unpleasant and ‘a cost of doing business’ – a compulsory commodity buy. Those who see it instead as an opportunity to purchase a long-term relationship and a genuine ‘service in adversity’ are sufficiently rare that when they are presented to one of the few remaining insurers they get a decent product designed for their needs. The PI submissions from such IFAs stand out a mile and insurers reward the obvious effort and professionalism.Thus it ever was.

    Regrettably, there are not many quality insurers nor many professional brokers of IFA business. Regulation has chased you down not quite into the gutter perhaps but certainly the back yard littered with old fridges and broken tricycles.
    Get a decent broker (ask questions) and you might find yourself indoors, in the warm, in front of a log fire (antique wood-burning stove if a Southerner).

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