Advisers’ professional indemnity insurance premiums will skyrocket if insurers pay out for Financial Services Compensation Scheme claims against Keydata distributors, according to Howden Insurance Brokers.
Law firm Herbert Smith has written to Keydata distributors on behalf of the FSCS to begin the process of recouping compensation paid to Keydata investors.
Howden director of retail Neil Pointon says: “I would estimate the total professional indemnity premium on an annual basis for the UK IFA world is approximately £40m. If insurers were to accept the claims in relation to Keydata, it would effectively swamp any provisions they have made and I would expect PI availability for IFAs to be much harder to come by and rates to increase dramatically.”
Pointon says if insurers reject the claims, firms could be pushed out of business, with claims against them being passed back to the FSCS.
He says: “PI insurance is not there as a product guarantee. It is there to cover negligence, errors and omissions. Just because the FSCS has seen fit to make these payments does not mean that PI underwriters will follow suit.”
Some PI policies exclude claims which involve suspended or illiquid funds. IFAs who have received an FSCS letter are advised to contact their PI insurer immediately.
Collegiate Management Services head of underwriting Richard Turnbull says: “A lot of policies previously had an insolvency exclusion which would have excluded Keydata but that is not so prevalent these days. Advisers will need to check their policies to see whether they have cover in place.”
Baronworth Investment Services director Colin Jackson says: “If you are an IFA that has never dealt with Keydata, it is grossly unfair that there could be PI rises.”