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Will PI scheme reach a captive audience?

Just over a week ago, the FSA proposed the creation of a mutually run and funded scheme to try to help solve the professional indemnity crisis facing many IFAs.

This proposal, outlined in the consultation 169: Professional Indemnity Insurance for Personal Investment Firms, has become one of the shortest-lived ever. It is already being effectively ruled out in many quarters, including Aifa and the FSA itself, which says it would not resolve all the issues.

In its place is a somewhat different concept – a captive insurer specifically catering to the needs of the IFA market. Last week, Money Marketing reported that there are high-level discussions between Aifa, the ABI, product providers, PI underwriters and the FSA aimed at the creation of such an entity.

Aifa policy director Fay Goddard says: “It is a long-term project but there are interested parties. We are working to facilitate meetings between those interested in seeing it get off the ground.”

It would be a profit-driven commercial business offering PI cover underwritten on an individual basis. The business would be managed by an FSAauthorised insurer, with the theory being that because it would not be exposed to other types of risk such as other professions, it would be able to offer IFAs preferential rates.

LIA head of public affairs John Ellis says: “Despite all the doom and gloom, there are insurers out there who are doing quite well out of selling PI to IFAs. This idea certainly warrants looking into in greater detail.”

In the main, the news has been greeted with cautious enthusiasm by IFAs.

Sofa chairman Nick Bamford says: “It sounds like a robust approach to the issue. This is a commercial world. It would appear to make sense that a venture reflecting that reality would do well in solving IFAs&#39 problems.”

Timothy James & Partners senior investment adviser Rob Guy says: “Conceptually, it is a solid idea because it might be the only way for firms to get all-encompassing cover and carry on their businesses how they want to without PI insurers dictating what they will and will not provide cover for.”

Others, however, are wary, saying that before they agree to take part or buy cover from the new venture, they would want to make sure the numbers add up.

Syndaxi Financial Planning principal Robert Reid says: “I think when you actually do the numbers, it would not come out brilliantly. We are talking about the creation of a reasonable price for IFAs here, which would be difficult to achieve if there was a profit margin attached.”

As for the rest of CP169,it is roughly divided into three sections. There is confirmation of plans to encourage PI underwriters to remain in or return to the IFA market.

There are also amendments to the FSA&#39s standard terms for PI policies aimed at making them more palatable for PI underwriters to sell which were due to expire on June 30. They will now be extended indefinitely.

FSA head of investment firms David Kenmir has admitted that these moves on their own have not been enough to resolve matters. He says underwriters have given a “guarded welcome to the changes”. Kenmir says: “Nobody has had a bad thing to say about the chan-ges but, equally, nobody has said they were going to offer more business as a result.”

The second part of the paper outlines a wide series of potential changes which could be brought in to make it easier for IFA firms to get PI cover.

Under the proposals, the current £50m in capital floor for firms wanting to be exempt from PI would be reduced for all firms with an annual turn-over of £10m or more. But this move would only affect less than 5 per cent of IFA companies, according to the FSA&#39s own figures.

Firms would be allowed to offset the excess on their PI policy against their regulatory-required capital reserves which literally means that if IFAs pay a higher excess, they would need less PI cover. IFAs owned by another company would be excused from having cover altogether if their parent firm guaranteed to cover any misselling claims made against it.

There is talk of a two-tier system, with basic PI cover required, as stipulated by EU directives, and then a top-up available for firms wanting more cover. Firms opting for the basic level of cover would be obliged to tell consumers they were only complying with the lowest level of PI cover.

The third area of importance which the paper touched upon is defining misselling. The regulator&#39s initial reaction to this idea was negative but its mood has changed.

Last week&#39s paper confirmed plans outlined by outgoing chairman and chief executive Howard Davies at the Aifa dinner last November that “very shortly” it will define what constitutes misselling. It also restates the fact that the FSA can no longer launch retrospective reviews without the approval of the Government.

For many, the uncertainty in the PI market is largely due to these issues. They hope that more room will be created in the market simply by a clear indication from the FSA that there will be no more retrospection.

Independent Financial Advice Centre managing director Brian Evans says: “The most pressing need from our point of view would be clear guidance from the FSA and evidence that it is standing by what it says in its manuals rather than launching any more retrospective reviews.”

Industry sentiment appears to be that the short-term moves will do little to change the situation while the long-term proposals, if taken forward, could alleviate some of the problems affecting IFAs.

It may take a proposal of great substance, however, such as the captive insurer concept, to truly sort out the PI nightmare once and for all.

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