With these problems seemingly not going away, Mr Billingham urged his peers to look very carefully at their due diligence processes and to filter out anything that appears inappropriate. When firms are forced to close because they cannot get cover other advisers are constrained to pay through the levy or higher PI premiums, which is why he claimed it was in everybody’s best interests to reduce risk and simplify operations.
Uncompetitive
Alex Morley, chief executive of Sanlam Wealth Planning, made similar observations on the uncompetitiveness of a market with just “two or three” providers left, and the importance of smaller, less wealthy firms avoiding riskier products.
As many of these smaller businesses do not have the means to self insure, he predicted that most will either switch to networks or become insolvent. Furthermore, because of an increasing number of restrictions on policies, he warned that a lot of IFAs would be forced to register as restricted.
“If a firm does not have the means to self-insure, and not many will have, what we saw with Honister could be repeated on a large scale,” he said. “It will drive companies into networks, or you will see these over escalated costs. Plus the FCA fees have shot up, and all of this will be paid for by the consumer.
“If you do not have the means to self-insure you need to rely on a third party. What is so independent about that? If your insurer will not cover you for certain things, you are forced to become restricted. There is a probability that firms that represent a higher risk, those established for a while, will see premiums go up to a level that is very uncomfortable.”
Legal advice
But not only financial advisers are concerned by these developments. Philippa Hann, a partner at law firm Clarke Willmott, said she is writing to the FCA to point out the “devastating effect” of “inadequate insurance”.
“I have been instructed both by advisers to fight their insurers over the terms of the insurance cover, and by customers of advisers who have received bad advice, only to find that the insurance is inadequate to meet the liability,” she said.
“Those clients are left in an unenviable position of only being able to pursue their claim against a defunct company or to bankrupt the poor adviser. In either scenario there are no winners,” she added.
Scapegoat
While the obvious scapegoat in this scenario are the insurers, Mark Bracher, managing director of Professional Indemnity, defended the work of his peers and claimed that the issues were caused by uncontrollable supply and demand issues. Because advisers work in an industry where claims are common, he said that PI underwriters saw IFAs as a “high insurance risk”, which meant that few remained in the sector, and those who did remain restricted their cover and increased premiums.
