PensionsOct 1 2019

Govt claims PII works well for majority of firms

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Govt claims PII works well for majority of firms

HM Treasury has declined to change the wording used in financial advisers’ professional indemnity insurance policies, as it considers the market is "working well for the majority of firms".

In a letter to Stephen Kinnock, Labour MP for Aberavon – who called for PI rules to be aligned with those in place for solicitors - John Glen, economic secretary to the Treasury, stressed that "PII works well for the majority of firms, apart from in exceptional cases of large scale mis-selling that cause firms to collapse".

He noted the Financial Conduct Authority had considered whether to adopt an approach of mandating policy terms or prescribing uniform policy wordings, but warned this could “result in PII becoming either unavailable or unaffordable”.

He added: “This would, in turn, force firms out of the market and reduce the availability of advice.”

Mr Glen also stated it was likely that any increased insurance costs for personal investment firms “would be passed down to consumers in the form of higher fees”.

Under current rules an adviser’s PI policy can exclude past business activity if the firm holds additional capital resources.

Since the British Steel pension transfer debacle more and more insurers have put in place exclusions on firms who advised steelworkers or carried out 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.

In contrast solicitors cannot have exclusions in their policies and are required to hold a minimum indemnity of between £2m and £3m for any one claim.

Philippa Hann, managing director of litigation firm Clarke Willmott, argued the additional capital requirement for advisers was a woeful amount which “is simply not enough”.

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.

She said: “Wouldn't it be easier to simply mandate PI insurers that they can't exclude liability for past business?

“It doesn't make sense to me that you can be running a firm with insurance in place that is designed to protect you and the client in case you make a mistake [and] creating a scenario where you can remove that safety net - [it] doesn't make any sense.”

But Damian McPhun, partner at Beale and Company Solicitors, said the PI markets for solicitors and advisers were different and introducing minimum terms wording wouldn’t work.

He said: “The solicitors PI market is a lot bigger than the IFA market, insurers take the view that you can sustain a few losses here and there, because you got a certain volume of premiums.

“The volume of premiums you get in the IFA market is significantly smaller, so it takes fewer claims to cause a problem for insurers.

“You also have a market with a lot more uncertainty because you're never quite sure what's around the corner, since the regulator might decide they're going to look at a new product or a new area of advice and bring in some rules, and possibly do a past business review.”

Mr McPhun noted the FCA had looked at this option in the context of the FSCS review.

He added: “I met with them on this, and they met with insurers, which said if you do that what is already a very difficult market may very well collapse.

“It is a bit of a balancing act and it is not ideal for anybody, but I don't think the silver bullet is to say let’s stop insurers from excluding or limiting firms' cover.”

Fiona Tait, technical director at Intelligent Pensions, agreed that changing PI policies for advisers “would be unworkable at the current time”.

She said: “It is already extremely difficult to secure PII cover for pension transfer business and I don’t believe many PI insurers would be able to offer terms on a profitable basis.”

Ms Tait argued most PI insurers were only prepared to offer cover where they could limit the amount of risk being taken on.

She said: “This leaves us in the invidious position where the PI insurers rather than the FCA are effectively telling advisers which clients they can and can’t deal with.

“Pricing advisers out of the market reduces the supply of advice at a time when DB members are obliged by legislation to ask for it, and may not in any case target the right firms.

“The ones who remain in the market will be those who can afford to pay for cover rather than, necessarily, those offering the best advice.”

maria.espadinha@ft.com

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