Professional indemnity insurers should be able to offer cover for the failure of a firm in the same way that run off cover can be arranged, according to Panacea Adviser chief executive Derek Bradley.
Speaking to FTAdviser, he argued that one of the main problems with rising Financial Services Compensation Scheme levies for advisers is caused by failed firms’ costs being passed on to the compensation scheme.
“The FSCS is the fund of last resort and is most likely to be on the receiving end of a claim because the firm has been unable to meet it’s claim liabilities when they fall due.
“It should be possible for PI insurers to factor into a policy cover, by way of underwriting, for the failure of a firm,” he suggested, adding that the excesses placed on IFAs are so high, they almost render PI policies useless.
A spokesman for the FSCS responded that there seems to be a trend for PI insurers to exclude FSCS claims in their policies.
“Normally, we will pursue recoveries against the firm or any third party that might be relevant to the claim,” he stated, adding that that usually includes the PI insurer if there was a valid policy in place.
Tenet Group’s adviser network offers PI cover through its captive insurer Paragon, getting additional insurance protection from the Lloyds London market.
Mike O’Brien, managing director of Tenet Connect and Tenet Select, explained that a claim can only go to the FSCS if it cannot be satisfied by any other means, like personal wealth of the adviser, firm or the PI policy.
“The PI policies are claims made policies, not claims occurring policies, so if the claim is made after the adviser has gone bust, then the policy will not be in place at that time and therefore no cover exists.”
He also pointed out that a number of advisory firms have gone to the wall because they sold products that were not covered by their PI policy anyway.
At the end of September, the Personal Finance Society’s chief executive Keith Richards warned advisers that facilitating pension transfer requests from ‘insistent clients’ could cost them when they renew their PI cover.
“You have to remember that just like car insurance, these contracts are annually renewable and they may well take the next opportunity to increase excesses or impose exclusions,” he noted.
During a hearing of the Treasury select committee at the end of October, its chairman Andrew Tyrie mentioned that FSCS chief executive Mark Neale had previously said that the compensation scheme could not make recoveries from PI insurers “because their contracts specifically write out claims from the FSCS, so in a way there are mechanisms that could alleviate some of the problems for advisers”.