Professional indemnity insurance will be examined as part of the Financial Conduct Authority’s review into the Financial Services Compensation Scheme levy.
Tracey McDermott, acting chief executive of the FCA, has told the public accounts committee she does not think there is an issue of deliberate under-insurance in the IFA sector.
But she said there were issues around PI insurance that may need addressing.
Ms McDermott said: “It has definitely become the case that indemnity insurance has become less useful at the point that it is actually required because of the fact that the excesses have been pushed up.
“It is not so much about deliberate under-insurance so much as it is around the insurers imposing significant excesses and so on and a combination of that with relatively low capital requirements for IFAs, which means they don’t have much of a buffer for claims.
“We will be doing a review of FSCS funding and the levy because that is also a concern for small businesses that it is very unpredictable.
“One of the things we will be examining as part of that is to look at how the PI market is working.
“It would be too early to say what the outcome will be but we want to understand the extent of this issue in terms of what types of firms it is affecting, what types of claims it is affecting, is it relevant to certain types of products and certain types of advice or is it a widespread problem across all sectors of the IFA industry?”
Ms McDermott was appearing before the committee to discuss the National Audit Office’s recent report into the redress process.
It found the FCA had gaps in its understanding of the compliance costs on firms and its lack of co-ordination with the Financial Ombudsman Service.
Meg Hillier, chairman of the committee, asked about a section in the report which said the FSCS was concerned about inadequate PI insurance being an important reason why it is unable to recover more.
Ms McDermott said the review into FSCS funding will be started in the next quarter but would probably take a year.
She also said she would “cautiously and carefully” like to see banks return to advice.
