Just like other professions such as lawyers and accountants, financial advisers are bound by their regulator to take out professional indemnity insurance (PII).
PII protects advisers and firms against client claims where advisers may have made a mistake or been negligent in their work, and helps firms maintain adequate financial resources - partly through helping to prevent insolvency. The requirement is set by the FCA, which expects a firm to always have a valid policy. As soon as a firm is authorised, it must have continuous cover.
A dwindling market
Bur brokers are reluctant to cover advisers, highlighting Arch Cru, Keydata, endowments and split capital investment trusts as some of the areas where there have been accusations of mis-selling.
“Insurers’ appetite has reduced significantly, primarily because it’s not just one-off negligence claims but industry-wide problems in the wake of mis-selling,” says Trevor Moss, director of insurance broker Brunel Professional Risks. “It’s an area where insurers are beginning to feel as if it is one crisis after another. Years ago we had the insurance market having to deal with a lot of losses coming from issues with endowment policies, and now it’s cases such as Arch Cru which have resulted in a lot of litigation.”
There has been a large amount of claims activity, which has made providers less likely to offer PII to advisers and, as supply has begun to dry up, prices have increased.
David Britner, broking manager at Manchester-based underwriters Towergate Lifestyle agrees. “It’s seen as a very, very risky business from an insurer point of view and the odds of a claim coming up are seen as being much more likely than other occupations,” he says.
One of the biggest problems in terms of costs adding up is that, even where an adviser is completely innocent, the defence costs incurred through legal proceedings to prove innocence are extremely high and are the insurer’s responsibility.
Risk and the RDR
One of the intended effects of the RDR was to make financial advisers a less risky group, with a broader knowledge base and tighter regulation. But this appears to be at odds with insurer after insurer leaving the adviser PII space and the cost of cover increasing.
For a post-RDR independent adviser, a policy must cover all retail investment products that clients may seek advice on, and if any product types are excluded on the terms of the policy, the company should hold additional capital as a form of insurance against claims in this area. It is important to make sure the cover applies to more ‘esoteric’ investments such as Ucis and ETFs. The sheer volume of product areas that a policy now has to cover - and some of those products being unregulated - is another reason insurers are often reticent to offer cover to advisers.