Increasingly we operate in a world of regulation. To a greater or lesser degree we are all regulated; even the regulators are regulated!
If you are a professional such as an independent financial adviser (IFA), you are highly regulated; the rationale for such regulation primarily being the protection of the consumer (and perhaps, more philosophically, society as a whole).
This article looks briefly at the history of regulation for financial advisers (which is relatively recent) and looks particularly at one obligation of regulation; the requirement of professional indemnity (PI) insurance, problems arising from it and what the future might hold.
IFAs are a relatively “new” profession. Before the Financial Services Act 1986 came into force, literally anyone could call themselves a financial adviser.
As a life assurance and pensions representative in the 1980s I remember calling on many “brokers” who held commission agencies with Sun Alliance, where it would be a stretch of the imagination to call them brokers.
Crying out for regulation
With more and more people purchasing financial services products, the whole area was one that was crying out for regulation and a regulator.
Well, the poor unfortunate financial adviser did not get one regulator, but many: LAUTRO, FIMBRA, PIA and finally (and probably here to stay) the FSA, have all been the regulators of financial advisers in the last 15 years or so.
Not surprisingly, perhaps, IFAs ran into professional indemnity (PI) difficulties. This was brought about in part by the so-called pensions mis-selling scandal. In short, an IFA who might have previously had a more or less claims free record, was being hit with literally hundreds of claims.
After pensions came FSAVCs, then endowments and now Splits and Zeros. However, there is no exclusivity when it comes to the subject matter of a claim.
The December edition of Health Insurance in its Round Table article focused on statutory regulation. The discussion included a debate on fact-finds.
The FSA places great emphasis on factfinds as part of the compliance process, but is a fact-find really necessary when recommending healthcare products? At least fact-finds to the extent required by the FSA? While certain questions and information are very important, the true answer is probably that fact-finds similar to that used for investment products are unnecessary for healthcare products.
However, under the current climate, without a full fact-find, an IFA could still be facing a professional negligence claim for the sale of a healthcare product. This brings us on full circle to the issue of PI insurance.
In this regard, IFAs and specialist health insurance intermediaries are facing problems in obtaining PI insurance. Underpinning everything is, of course, the fact that PI insurance is a contract and, of course, like all contracts, its terms are subject to bargaining and negotiation between the parties.
For example, the FSA (and indeed advisers themselves) are concerned that PI insurance often excludes certain risks to the detriment of the IFA or intermediary.
However, exclusion clauses have always been part and parcel of an insurance policy and always will be. Every insurance policy, be it household, motor or personal lines will contain exclusion clauses. PI policies are no different.
Why shouldn’t a PI insurer exclude, for example, claims arising out of the sale of low cost endowment policies, particularly if such claims have already been notified to a previous insurer.
Another difficulty is that currently advisers are finding it increasingly difficult to obtain PI insurance, as insurers are pulling out of the market. That position is simply a reflection on the marketplace. Insurers are in business to make a profit, and hopefully to make an underwriting profit. If they do not, they will act accordingly.
One option is to pull out of the market altogether. Such a scenario merely reflects the realities of the marketplace. In short, there is a very good reason why only three or so insurers are offering PI cover to advisers; it is because in the past they have made losses.
However, for IFAs and intermediaries it does not have to be like this forever. A lead can be taken from the health insurance industry. Suzanne Clarkson, in her editorial in December’s edition of Health Insurance, stated: “The health insurance and protection industries have a valuable opportunity to shape their own future.
“But it is important to approach the FSA with a solution, rather than a problem, and to show that the solution still meets the regulator’s objective … All it takes is a bit of joined-up thinking.”
The same comments can apply to PI insurers for IFAs and intermediaries. To set up a good, efficient professional indemnity scheme for a particular group of professionals, there are three different parties who will need to discuss the matter.
These parties are the insured (ie the IFA or intermediary), the insurer, and crucially the regulator. If the relationship is a good one, the system works well.
For example, the solicitors’ profession operated its own PI scheme through the Solicitors’ Indemnity Fund for some time, with the Law Society playing a crucial role. Now that solicitors’ PI insurance is on the open market, the close relationship with the Law Society still remains.
United we stand?
If all the interested parties can get together, they could introduce a system that might balance everyone’s interests (particularly the consumers). Instrumental in any change should be a look at the claims philosophy of the regulator.
For example, under the Pensions Review regime that was set up and authorised by the regulator, investors received, completely out of the blue, envelopes headed “R U Owed”. No wonder there was an explosion in claims.
That perhaps is for the future but there are some who think it is only a matter of time before the FSA becomes actively engaged in negotiating the terms and conditions of PI policies.
In the meantime, what should IFAs and intermediaries who are experiencing difficulties in obtaining PI insurance (or indeed experiencing difficulties with regard to any PI issue) do? Well, keep communicating those issues to their PI brokers and also to the FSA and remember, you are not alone. If you are an adviser experiencing difficulties, then so are your peers.
David Turner ACCII, is a partner of Bond Pearce, solicitors in Exeter, Plymouth, Bristol and Southampton
Consultation Paper 160: Insurance selling and administration – the FSA’s high-level approach
Relevant to: firms who sell, advise on, arrange or administer general and health insurance contracts and non-investment life insurance Proposals on disclosure of information to consumers;
the sales process (including advice);
complaints; and training and competence.
This also covers key aspects of the FSA’s proposed implementation of the Insurance Mediation Directive. Consultation on full set of draft conduct of business rules in 2003.
Revised timetable for industry regulation
|Dec 2002||Consultation paper published|
|2nd quarter 2003||Consultation on draft rules|
|2nd half 2003||Final FSA rules published|
|October 2004||Legislation becomes effective – firms to be authorised by this date, and FSA rules come into effect|