Damian Fantato  

Turning the tide on PI needs more than a letter

Damian Fantato

Damian Fantato

A popular story about Canute – one of England’s earliest kings – is that he sought to turn back the tide to prove how powerful he was.

But the original 12th century story actually aims to prove how humble the king was, by demonstrating his power was nothing compared to that of God’s.

It is not yet clear whether the Financial Conduct Authority’s recent letter to professional indemnity insurers is an example of the former or the latter – but ultimately it is likely to have the same effect as King Canute’s doomed command.

The FCA sought to clarify the Financial Ombudsman Service’s approach to its new compensation limit – raised to £350,000 in April – in order to quell fears among insurers and, hopefully, help them provide cover to financial advisers.

It has told insurers only a “small minority” of cases would involve issues that qualify for the higher award limit and the Fos has introduced additional quality controls to ensure consistency when dealing with larger awards.

But, ultimately, PI insurers make their money from the careful assessment of risk and reward and they have been coming to the gradual conclusion over the course of several years that insuring financial advice is an increasingly risky business.

The events of the past few months – which have seen advisers face surging premiums – are the results of many years of travel in this direction and it is unlikely the FCA’s reassurances will have any effects beyond the margins.

More radical reform of both the PI market and, probably, the Financial Services Compensation Scheme will be needed to get to the bottom of this for once and for all – for the benefit of both advisers and investors.

Anything else is mere trifling with the forces of nature.

damian.fantato@ft.com