In their response to the Joint Committee on the draft Financial Services Bill the Financial Services Authority (FSA) used the justification of “Public Policy” to call for changes to the law to remove the direct link that exists in law between causation and compensation.
PI Expert believes that this argument is fatally flawed. It is our view that altering the laws of natural justice in the way suggested by the FSA will directly result in the public being less well protected than as is the case under the current regime. To suggest otherwise implies a failure on the part of the regulator to understand the very mechanisms that are in place to protect customers.
The effect of the FSA’s proposals will result in advisors being required to compensate not only for the affects of inappropriate or bad advice, but also in cases where the advice that they have given is correct, but during the course of the advice being given an FSA rule, however minor, has been broken. This might include for example failure to record the issue of a key facts document or Initial Disclosure Document.
The net result will be an increase in the amount of compensation paid, and when claims farmers get wind of a no fault compensation scheme, a steep increase in the level of spurious claims.
Of course it is not the Advisor who pays these claims, but their Professional Indemnity (PI) insurers. The bottom line therefore is that it is the PI insurance cover, not the rules and regulations put in place by the regulator, which underpins and provides financial security to consumers
The PII market for Advisors is currently in a good position. General brokers are not seen as a high risk and pay relatively low premiums. Mortgage Advisors saw some upward pressure on premiums during the early days of the economic crisis, but largely this situation has now stabilised. IFAS’s have experienced issues arising out of pensions, endowments and market specifics such as Key Data and similar market issues, although rated more highly than other types of advisors, are still able to buy PII cover at relatively reasonable premiums.
There is a good range of well resourced, reputable, A rated insurers who are prepared to underwrite the advisors PI market. This is a significant benefit to the consumer and, indirectly, to the Financial Services Compensation Service.
Rating of PII is largely controlled by the level of claims. Advisors who regularly give bad advice receive more claims than those who provide good advice. Advisors with poor claims histories pay higher premiums or struggle to find insurers prepared to cover them. As evidence of PII cover is a requirement for continued authorisation this rating process forms a natural barrier to trade for advisors that give poor advice and in itself provides a method by which the industry silently polices and removes bad firms.
The proposals made by the FSA would have the effect of removing this self regulation process.
The moment that the law requires firms to pay 100% compensation when they have not caused or contributed to a loss the differentiation in PII claims patterns between good and bad firms will be lost. If claims go up then premiums go up. If claims go up exponentially, and underwriters can’t make a profit, then insurers will start withdrawing from the market. And if Insurers withdraw from the market or advisor can no longer afford to pay premiums then the mechanism that protects customers (PII) is fatally undermined.
This is a scenario which has already played out across two other professional sectors – Solicitors and, to a lesser extent, Surveyors. For both of these sectors there is a limited and decreasing market of A rated insurers who are prepared to underwrite to the stringent requirements of the regulatory body.
The Solicitors PII market provides an unpleasant vision of how the insurance advisors PII market could look if the FSA proposals on causation and compensation are accepted. Over the years the number of insurers prepared to underwrite solicitors business has dwindled to just 19. Premiums have sky rocketed.
There are still A rated insurers on the SRA approved list, including Allianz, Liberty and Travellers, however many of the A raters are refusing new business or have priced themselves out of the market for existing clients. Chartis, who were the largest solicitors PI insurer in 2010, withdrew from writing new business for Solicitors PII in 2011 and actively worked to reduce their exposure for existing policyholders. The emerging theme in the solicitors PI market has been the entrance of a number of foreign unrated insurers – Alpha (Denmark), European Risk Insurance Company (Iceland) and Enterprise (Gibraltar).
The Solicitors Regulation Authority states clearly that it does not regulate, vet or approve insurers on the list. The SRA famously gave Quinn access to market shortly before the company suffered a solvency crisis. To be fair to all concerned at the point of authorisation Quinn did carry a credit rating, but it fell short of the gold plated A that most brokers look for when placing business.
Evidence of an insurer’s financial rating is key component in placing cover. The financial security offered by unrated foreign insurers may be better than some of the UK markets, however in the wake of the Quinn fallout Steve White, Head of compliance and training at the British Insurance Brokers’ Association commented in an interview with Insurance Age
“Brokers have a duty of obligation and care. While the broker is not the guarantor of the insurer, the law does expect the broker to exercise due care in selecting an insurer and brokers should be mindful of that when making their selection. One of the factors that a broker can take into consideration is the credit rating. Though there may be other considerations, the absence of a credit rating could leave a broker vulnerable to allegations of a breach of duty of care.”
If the Insurance Advisors PII market followed the same course as the Solicitors PII market, as well it might if the FSA’s request is enacted into law, the industry could well see a deterioration in the financial rating of its own insurance carriers. This would be a disaster for the industry as a whole and for consumers in particular.
PI Expert hopes that the regulator will reconsider this ill conceived suggestion. For our part Brokers and Advisors must make our voice heard in this important debate.
PI Expert – Independent, Authoritative, Incisive Professional Indemnity Advice for the Financial Industry For help and advice call us on 01825 745410. www.facebook.com/PIExpert