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Vital need for a PI shake-up

I occasionally get asked by conference organisers what piece of music I would like played as I walk on to speak.

Over the last year, it has been tempting to ask for Always Look On The Bright Side Of Life from Monty Python&#39s Life of Brian.

But there are one or two signs that we may be on the upswing, especially if press rumour proves justified that the FSA is about to make a policy shift on how independence should be defined in a post-CP121 world.

The constraints of the defined-payment system could be replaced with something more flexible and more in line with current market practice – why not the Aifa menu, outlined in our CP121 response?

But one cloud remains as ominous as ever. The PI market is beset by a worldwide excess of demand over supply, so premiums are rocketing. IFA firms cannot get the levels of cover they need. Even if they do, the terms may not meet the prescriptive and detailed FSA requirements.

We have persuaded the FSA – after some badgering – that it has to look again at these requirements so that good IFA practices are not put in breach of rules by the general lack of cover.

We have surveyed Aifa members so there is accurate information on the state of the market.

The regulator has indicated that firms should talk through their PI problems as, if the problem appears to originate in the market&#39s ability to offer compliant terms, they are likely to get a sympathetic hearing.

But we also need to look to a longer-term outcome as well.

As far as I can find in my researches, PI cover was first used by brokers so that their firms were not brought down by errors or omissions. The cover was made mandatory to allow IFA firms to have lower levels of capital than might otherwise have been required. PI was a capital substitute, ensuring that a firm had something behind it if a claim for damages had to be met. But another pernicious by-product of the pension review was to increase the level of claims to a point where the cover was paying across a wide waterfront.

The time has come to re-examine the inter-relationship between capital and indemnity insurance. Many IFA firms have capital resources which should be taken into account when determining the level and terms of the PI cover which they should be expected to carry. I believe that the positive effects of a change of this nature will go wider than the firms directly affected.

Insurance capacity will be released and we may even see greater competition for IFA businesses which could in time put downward pressure on premiums.

All IFA businesses need PI cover. The risk of errors and omissions are as great as they ever were. The need to protect other IFA firms from claims on the compensation scheme is also important.

But the FSA can back away from some of the prescription – where the firm can justify it – and stop honest advisers being made in breach of the rules. The FSA can also do more to stiffen the confidence of the PI market that the era of the retrospective review is dead and buried.

I see that David Kenmir (whose interest in this subject has been most welcome) has suggested an industry mutual to provide insurance.

He has been less forthcoming about where the funding would come from. I can see no orderly queue of providers and advisers forming outside my office waving cheque-books. It will not be cheap and it must not become a repository of bad risk.

The first call is with the regulator and an industry deus ex machina is not going to arrive to remove that responsibility.

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