One of my favourite topics (outside of running, swimming, cycling and how amazing my kids are) is professional indemnity (PI) insurance.
I spend a large proportion of my time bringing legal proceedings for and against financial institutions on behalf of individuals. As a result, PI insurance has become somewhat of an obsession of mine.
In my humble opinion, PI cover for advisers is woefully, and unnecessarily, inadequate.
The FCA requires advisers to have PI which is appropriate and covers them for any claim for which the firm may be liable.
This may be as a result of an act or omission by the firm or any person acting on behalf of the firm, such as appointed representatives, tied agents and employees. So far, so good.
But where PI begins to fall down is in its treatment of exclusions.
The FCA requires that an adviser’s PI policy must not exclude any type of business or activity that has been carried out by the firm in the past, or will be carried out by the firm during the time for which the policy is in force.
This is unless, and I would stress this point, the firm holds additional capital resources.
Yet the requirement for additional capital resources is, quite frankly, laughable. For example, a firm with an income of between £400,000 and £500,000 must hold additional capital of £23,000.
The importance of this is in the way the PI policy is drafted.
PI policies generally operate on a 'claims made' basis. This means the policy is triggered when a claim is notified, rather than when the negligent act or omission actually occurred.
If you receive a complaint in 2019 relating to advice given in 2017, it is the 2019 policy which will respond.
You may well have seen the clauses written into new insurance policies which exclude liability for specific, and by then well known, products or areas of advice.
The way the market works allows firms to operate with gaping holes in their PI insurance, holes which are very likely to relate to business which they have, in fact, done.
We need only think of exclusions for business relating to Arch cru, Keydata and Harlequin, not to mention defined benefit pension transfers.
Because of this, there is an inevitability that the firms giving advice in these kind of areas will fail at the first complaint.
In the event of an advice firm collapse, clients will suffer significant detriment and the rest of the profession will pick up the tab through Financial Services Compensation Scheme (FSCS) levies.
Compare this with solicitors’ insurance. The Solicitors Regulation Authority requires a minimum limit of indemnity of between £2m and £3m for any one claim.
Defence costs, that is, fees paid to legal advisers to defend the firm, cannot be included in that minimum.
The policy must not exclude or limit the liability of the insurer regarding any alleged negligent advice. Full stop, no exceptions.
Solicitors therefore cannot suffer the same gaps in their insurance as suffered by advisers. And therein lies the problem.
British Steel, and what next
The issues outlined above have been brought into stark focus by the problems related to British Steel in Port Talbot and the surrounding areas, where there have been significant issues with the quality of pension transfer advice.
As a result, some advisers are having problems in renewing their PI insurance to include pension transfer advice, and specifically DB transfers.
Anecdotally, steel workers are reporting that hundreds of their peers were advised to transfer out by the same advisers.
Based on my own experience, having reviewed 167 files from steel workers relating to 17 different advisers, I haven't seen a single transfer which I don't have concerns about.
So if that advice was negligent, then the lack of insurance will inevitably mean widespread insolvencies and immense pressure on the FSCS. The number of pension transfer complaints could run into the thousands.
Nick Smith MP and Stephen Kinnock MP, who both have constituencies in the affected area, have both pressed this issue in Westminster.
But more work needs to be done to change things.
As advisers and planners, you ought not to be left effectively uninsured, or to be suffering the burden of wrongdoing by rogues who simply put their firms into liquidation and walk away.
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 practice 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.
Yes, it's true that under this scenario premiums would likely rise as a result, at least in the short term.
But is it not better to have an increased insurance premium rather than face the continued uncertainty of the FSCS levy?
So, what are we going to do about it?
I would be delighted to hear from you about your experiences and worries about your PI insurance. If you're happy to share your experience, you can contact me by email on Philippa.Hann@clarkewillmott.com, or via Twitter @philippahann.
Armed with this information, together with your support, we can lobby both the FCA and the government for change.