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The meaning of PI

According to Boswell, Sam-uel Johnson once saw two women shouting

across a street from the first floors of two houses opposite each

other. “They will never agree,” he is alleged to have said, “They are

arguing from different premises.”

Which brings me to professional indemnity insurance. At the heart of

the chaotic PI market for IFAs, there lies a divergence bet-ween the

FSA and PI underwriters over what PI should deliver. Is it an

essential pillar of consumer protection, as the FSA would argue?

Without it, the Financial Services Compensation Sch-eme would be

exposed to more complaints, consu-mers entitled to redress would take

an age to get redress and consumer confidence would be reduced.

Or is it there to safeguard the IFA firm? That, after all, is the

usual purpose of insurance. IFAs need to have protection for their

businesses, especially in this litigious age. Trading without PI

cover, even on a temporary basis, requires strong nerves and a

healthy balance sheet.

Do the different perspectives matter? Assuredly. While one party

attempts to deliver one set of objectives via a mechanism des-igned

for another set, the result will be disorder at best and the grist in

the mill will be IFAs unable to secure meaningful PI cover at

reasonable prices.

There urgently needs to be better dialogue between the regulator and

the PI market to address this contradiction. It is difficult enough

for anybody in any sector to get PI cover these (litigious) days

without multiplying the problem by a factor of 10 because of a lack

of mutual comprehension.

There is also more which could be done to build mutual confidence.

The pension review was a huge shock to the PI underwriters who felt

that they had priced risk on one basis and paid out claims on

another. I happen to be in the camp which believes that retrospective

reviews of past business are well nigh impossible under a statutory

regime and that the pension/FSAVC review was a ghastly one-off.

But the PI market needs more to convince it and not just another

lecture from me on constitutional law.

The welcome agreement by the FSA, first announced at our dinner last

November by Howard Davies, to define misselling is one such move. Sir

Howard stated that a key principle should be that the applicable

standards were those in force at the time of advice, not what those

standards might, with the benefit of hind-sight, have ideally been.

This ought to give the PI market some reassurance that goalposts are

fixed, not moveable on a regulatory whim, which is not to say that

the general duty of care owed to a client by an adviser changes over


Confidence also depends to a degree on the intangible. The fact that

the FSA is concerned enough to produce a definition of misselling is

evidence of a different regulatory wind, more reassuring for PI

insurers. We look forward to seeing the FSA&#39s work in the future.

Then there is the question of an industry scheme, as encouraged in

CP169. The second audience for the FSA is the provider community.

They, too, need reassurance about regulatory intentions and the FSA

can also help convince them of the gravity of the present situation

to reinforce Aifa&#39s own messages.

Will PI capacity return at sensible prices and offer reasonable

protection? If I knew the answer, then I would be coining it in the

insurance markets, not writing columns for Money Marketing.

But markets do turn and why should this one be any different?

However, some markets need help in turning in case they do not do it

of their own volition. Communication is definitely needed.


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