Regulation 

Could pooling insurance help solve advisers’ PI problems?

Could pooling insurance help solve advisers’ PI problems?

The Personal Finance Society is pushing for a solution to advisers’ professional indemnity insurance woes in its calls for reform of the Financial Services Compensation Scheme.

The professional body’s solution – a savings and investment monetary protection and education levy – was put forward to the Financial Conduct Authority and HM Treasury in May last year.

Keith Richards, chief executive of the PFS, warns that as the PI market continues to harden it is likely to compound the level of liability placed upon it, resulting in poor outcomes for clients and the market as a whole.

Mr Richards also worries the FCA’s proposals to double the Financial Ombudsman Service compensation limit – from £150,000 to £350,000 in April 2019 – will increase advisers’ PI premium costs further.

Pooled solution

To protect advisory companies, and clients, from potentially devastating consequences, the PFS recommends a fundamental overhaul of the FSCS – to replace the compensation funding system with a protection and education levy, collected centrally by the government, with advisers also contributing, thus pooling the risk.

Mr Richards describes the mechanics behind the levy solution as “an alternative funding mechanism to the FSCS”, one which incorporates “an answer to PI”, addressing “the untold level of liability that now sits in the FSCS”.

He says: “If adviser contributions went into the same fund to pool the risk, the current need for PI insurance would be disposed of.

“While excesses could still apply, over time, the build-up of the fund could reduce contributions and help mitigate financial failure.”

Key Points

  • As the PI market hardens, it is likely to compound the level of liability placed on it
  • The FCA has put forward its own plans for the FSCS, suggesting a number of changes to the PI market
  • The Personal Finance Society's Keith Richards has put forward an alternative, which creates a pooled fund for investments

The FCA has put forward its own plans for the FSCS, suggesting a number of changes to the PI market, such as forcing insurers to cover some of the costs of compensation by allowing the body to claim against a defaulted company’s insurance.

But this has led to concerns that PI insurers will simply leave the market, or that the FCA’s overhaul of the FSCS will amount to no more than what Mr Richards calls a “reshuffling of deck chairs”.

Instead, he suggests the necessary funding could be achieved, on the premise that most in the market accept the need to contribute to regulation and protection, without forcing the burden on any one sector.

He explains further that if total funds under management in the UK retail sector amount to several trillion pounds, FSCS and regulatory fees could be adequately covered by a few basis points each year, collected centrally, and combined with sector contributions to provide fairer funding and a more sustainable long-term solution.

Industry collaboration

Andy Kirby, managing director of Money Alive – an adviser portal supporting advisers with the defined benefit transfer process – agrees it is becoming more difficult for companies to obtain PI cover, which, in turn, compounds transfer risks.