The PI monster raises its head
The professional indemnity insurance industry is a worrying influence on investments
Even as the FSA aims to widen the investment choices which IFAs must consider from 2012, a host of other developments in regulation and in the markets may be setting new boundaries. Not least among these is the turmoil in the professional indemnity (PI) insurance market where excesses, exclusions and the sheer difficulty of getting cover may narrow the options for IFAs and ultimately for their clients.
The insolvency of Honister Capital – partly over a failure to secure PI insurance – continues to be the most visible manifestation of the PI crisis. However, although this case proves what a disaster PI problems can be for IFAs and clients, it is clearly not the only one.
A motley combination of actions and policies from the Financial Services Compensation Scheme (FSCS), the Financial Ombudsman Service (Fos) and the FSA across a host of areas may be restricting investment advisers’ freedom of action. It will put up costs and increase the premiums IFAs and other advisers must pay as a result of the risks involved in certain types of investment business.
It is a long and varied list. It includes the FSCS’s decision to pursue advisers over compensation for failed Keydata products and a Fos ruling demanding that a national IFA buy back a client’s investments in a Ucis – an unregulated collective investment scheme. It includes the ongoing debate at FSA board level about redress for the failed Arch Cru fund range. It also encompasses the FSA decision to effectively ban certain types of products such as some Ucis and life settlements funds.
Certain types of investments will clearly be deemed toxic and are likely to become too expensive to service no matter how airtight the advice on them
The last initiative is not without painful consequences for the market, IFAs and their clients if such a ‘ban’ comes long after the products have launched and attracted investors. Future policy proposals such as placing more compensation scheme burden on the investment intermediary category won’t help either.
Indeed, that consultation paper also includes a passage where the regulator says it wants to see networks consider ways in which they can get their members to shoulder the burden of unexpected PI bills.
Certain types of investments will clearly be deemed toxic and are likely to become too expensive to service no matter how airtight the advice on them.
However, PI can influence the market in subtler ways. Adviser network Tenet has offered lower PI excesses to members if they recommend multi-asset funds with a risk rating – although whether this translates into funds that will be suitable for clients is another question altogether. This may be making explicit what we already knew – that certain safer types of business will carry less risks for a business and cost less to advise on and distribute. Tenet says it is exploring a similar deal for its directly authorised firms.