Stephen Kinnock, Labour MP for Aberavon, has called on the government to change the professional indemnity insurance rules for financial advisers, a sector he branded the “wild west”.
The South Wales MP, who has been supporting former members of the British Steel Pension Scheme, wants similar PI rules for advisers as the ones that are in place for solicitors.
He said the problem with the current rules was the "loophole" that allowed advisers to operate without being covered for all their activities.
He told FTAdviser: “There is clearly a very worrying loophole in the law around the issue of indemnity insurance.
“What we've said to the government is that they should take the same approach that exists in the code of conduct for solicitors, where they are obliged - before they can practice - to have this indemnity insurance coverage.
“But I'm afraid the financial services industry, in this area, is a wild west, and they [rogue financial advisers] are finding loopholes, it's not properly regulated, the Financial Conduct Authority doesn't seem to have the right regulatory tools.”
Under current rules an adviser’s PI policy can’t exclude any business or activity carried out by the firm in the past, unless the firm holds additional capital resources.
But since the British Steel pension transfer debacle more and more insurers have put in place exclusions on British Steel or even pension transfers altogether.
Typically, a financial advice firm with a PI exclusion would have an additional capital requirement of the higher of £20,000 or 5 per cent of investment income plus 2.5 per cent of insurance mediation and home mediation income.
But under the rules governing solicitors firms cannot have exclusions in their policies and they are required to hold a minimum indemnity of between £2m and £3m for any one claim.
Mr Kinnock said modifying financial advice PI rules would require a change in legislation but he thinks this could be achieved.
He said: “Everything seems to be disappearing into a black hole, I don't really understand why more isn't being done to tighten up the regulatory framework in this area.”
HM Treasury has been approached for comment.
Philippa Hann, managing director of litigation firm Clarke Willmott, is in favour of such change.
Ms Hann is in the process of helping more than 200 former BSPS members bring claims against almost 30 advice firms and there are concerns inadequate PI cover will mean the Financial Services Compensation Scheme will have to pay out on behalf of many of these firms.
Ms Hann said: “Insurance must be worth the paper it's written on. As such, insurers ought to be encouraged to make it difficult for rogue advisers to practise by taking responsibility for their actions.
“If an insurer is required to cover an adviser for all claims, without exception, then we can quickly expect the insurers to know what advice they are giving. We can also expect them to price bad advisers out of the market, or to refuse them insurance at all.”