Quality of advice has increasingly little bearing on the scale of cover and premiums charged for professional indemnity insurance, one insurer has admitted to FTAdviser, citing the general disregard for advice processes by the Ombudsman when assessing claims.
Financial advisers are increasingly being exposed to the commercial risks of advising on business areas for which they do not have PI cover, with one case in particular revealing a trenchant stance and a “blanket no” to unregulated investments from insurers.
An adviser, who declined to be named, told FTAdviser that as his business mainly deals with unregulated investments for sophisticated and high net worth clients, who were excluded from a Ucis marketing ban imposed by the regulator last year, no insurer will provide cover.
He added that it seems to be a “blanket no”, with insurers not enquiring about his advice processes, the kind of clients he has, or his claims history. He claims to have never had a single complaint.
He said that due to the Financial Conduct Authority’s view on Ucis and the Financial Ombudsman Service’s stance on complaints, insurers have the “perfect platform” to reject this business.
A spokesperson for Axa, which offers PI insurance through a tie-up with Aon, said this is “not a new phenomenon” and has been common practice for “many years”, with previous examples of high-risk areas including split capital investment trusts, structured products and pension transfers.
“The fact is the risk to insurers correlates better with the type of products sold than the quality of the advice given.
“This is partly because standards are universally higher today than they have been in the past, and partly because of the Fos’ emphasis on finding recourse for complainants regardless of quality of advice.”
The adviser spoken to by FTAdviser said it is likely he will have to take insurance that does not cover any of his legacy advice and excludes the majority of future recommendations based on his current business, leaving him exposed to the commercial risk of future claims.
The case echoes concerns raised by chartered financial adviser Phil Billingham, who runs an adviser support services consultancy and told FTAdviser previously that he has seen the PI market ‘hardening’ in terms of higher premiums, excesses and exclusions.
Research published at that time by the Association of Professional Financial Advisers revealed 31 per cent of 271 advisers saw their premium increase this year, by around 14 per cent on average.
Mr Billingham said he is seeing policies that exclude covering entire business areas, in effect forcing advisers to go ‘restricted’ to limit potential liabilities.
The spokesperson for Axa added: “We recognise that everything else being equal we would rather insure firms giving better quality advice – of course.
“It is difficult for advisers. We recognise that certain clients need advice on what are considered non-mainstream investments. The attitude of insurers is really driven by the attitude of regulators which makes any advice in these areas potentially dangerous.
“IFAs should select insurers with specialist knowledge and avoid regular switching of PI provider.”
A PI expert, who also declined to be named, added that insurers should judge each case on its merits and that it should not be an “automatic no”.
However, he acknowledged “a trend” of insurers refusing unregulated business, partly due to the claims which have resulted in “large payouts”.
He said advisers should seek to get cover by going through an independent broker and should not contact insurers themselves.
Tom Simcox, founder of independent broker Simcox Brokers, agreed that insurers are applying exclusions, including unregulated collective schemes.
He said: “I recently organised PI cover for a financial adviser whereby the premium was £20,000 and the exclusions were Arch Cru, Keydata, Matrix and Ucis. A lot of insurers also apply insolvency exclusions but some do not apply this as standard.
“Generally we find blanket endorsements with unregulated investment schemes. The best bet is to go through an independent broker who will go to the insurers in the market, but there aren’t that many now.”
