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Tenet warns about FCA professional indemnity reforms

Tenet warns about FCA professional indemnity reforms

The group regulatory director of Tenet has questioned whether the Financial Conduct Authority's reforms of professional indemnity insurance will achieve lower costs for advisers.

Mike O’Brien said the difficulties facing the professional indemnity market were "a strong reflection" of the regulatory uncertainty and the lack of alignment between the FCA, the Financial Ombudsman Service and the Financial Services Compensation Scheme - particularly with regards to future consumer complaints.

To address the issues in the professional indemnity insurance market, the FCA has said it is considering introducing mandatory terms for PI insurance, such as requirements to have run off cover and restricted use of limitations.

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But Mr O'Brien said this could push the cost of PI insurance up, which would negate reforms to bring down the FSCS levy.

He said: "We agree that FSCS should be the last line of defence but simply swapping FSCS levies for higher PI insurance costs would not achieve the objective of a sustainable and affordable advice market.

"The costs in aggregate must achieve a lower cost base whilst, still giving a fair measure of consumer protection.

"The FCA has acknowledged that the PI market is small and whilst enforcing a minimum standard of cover is probably a good thing, there is a danger that more insurers will pull out of the market altogether or offer to provide cover at an unrealistic cost."

In its consultation on the Financial Services Compensation Scheme levy, the Financial Conduct Authority questioned whether PI insurance is working.

The regulator stated there are few PI providers active in the advice market, usually around 10 to 15 firms at any one time, although there have been some recent entrants.

The FCA stated the small size of the PI insurance market means it can be especially vulnerable to wider fluctuations in market conditions, such as interest rate changes, equity market volatility and the overall availability and price of insurance.

This means that when markets harden and there is less profit to be made, PI insurance may not be a first choice for larger insurance groups deciding where to allocate capital.