the regulator writes to companies a month before their existing cover expires explaining how they can apply for lesser insurance burden
The FSA has begun dealing with intermediaries seeking a waiver from the requirement for fully compliant professional indemnity (PI) cover.
It is writing to firms a month before their cover expires reminding them of its requirements on PI. This sets out how a firm can potentially receive a waiver from the FSA if it is unsuccessful in getting cover.
So far the regulator has dealt with four firms, giving one a waiver and refusing it to another three. There are some 20 further cases pending.
The regulator is keen to be seen as sympathetic to the plight of intermediaries. At the end of last year it temporarily eased rules on PI cover. Until then only firms with a market cap above £50m were exempt from it, but the rule has since been changed to firms with an annual turnover in excess of £10m.
For those below this threshold the regulator is potentially prepared to grant a waiver of their need to have fully compliant cover, on a firm by firm basis. In addition the regulator is holding a series of workshops starting this week to get the views of intermediaries.
The problem facing IFAs trying to obtain PI cover is not one that is going to disappear any time soon, the FSA has admitted.
In November 2002 it modified and relaxed rules on PI cover until 30 June 2003. In February this year it brought out consultation paper 169, which proposes making many of these temporary changes permanent.
David Kenmir, director of the investment firms division of the FSA, is responsible for PI as an issue at the regulator. He told Investment Week that any solution coming about as a result of the consultation paper is just part of a longer more fundamental examination of how the market works. As well as the FSA, several government bodies are independently reviewing how PI insurance affects different parts of the financial services and legal industries.
The Office of Fair Trading is conducting a market study of employer liability that it aims to publish later this spring. It is to cover PI insurance for a range of professions including IFAs. The Department for Work & Pensions is undertaking a separate review of employer liability insurance and the Treasury is taking an interest in the final outcome of all of these.
Kenmir at the FSA is charged with trying to co-ordinate the thrust of the FSA's conclusions with the views emerging in the other, separate reviews. As yet the FSA is not clear when these will all report.
Intermediaries who have been directly affected are not holding out much hope that change will solve the underlying problem.
Gillian Cardy, principal at Professional Partnerships, argued that demands on insurers will continue to lead to high claims.
She added: 'Where else have people been sent letters inviting them to complain? The pension review distorted the market and led to large losses for the insurers which made them fearful about the market. I don't think the changes proposed so far will make a great deal of difference for ordinary advisers because they are unlikely to address the fundamental problem. Not enough money is being set aside by intermediary firms to compensate for mis-selling claims.'
Many insurers feel it is hard to know what to charge for PI cover as they are uncertain what constitutes mis-selling, and in some cases they are wary about offering cover at all.
Where they do, insurers are pricing in a worst-case scenario. Those underwriters which haven't been put off the market altogether have drastically increased their costs. Nick Bamford, chairman of Sofa and managing director of Informed Choice, recently managed to get cover after a long spell when he was repeatedly refused.
He said: 'Over the last two years the cost of cover has gone up more than 10 times. For our firm of eight appointed persons we now pay a premium of £28,750 compared with £2,750 in 2001.' Bamford estimates that insurers are now looking to take premiums of 5%-10% of turnover from around 1%-2% a couple of years ago.
Tracey Mullins, director of public affairs at Aifa, said: 'PI cover is there for the protection of firms, it is not just an issue of consumer protection. A small IFA firm without PI cover could lose the roof over its head in case of claims.'
Aifa has a full list of PI insurers on its password-protected members website.
For more information go to www.aifa.net.
fsa advice to intermediaries
The FSA will write to intermediaries ahead of their PI cover expiring. Advice to intermediaries being given to IFAs by the FSA at this stage:
1) Take all reasonable steps to obtain compliant cover and if obtained self-certify this to the FSA. IFAs can do this when the insurance broker has informed them that they have cover on risk, but intermediaries must ensure that they have all of the information they need to complete the form correctly.
2) IFAs must also tick the box to apply for the Modification (to the FSA's requirements in relation to PII) if they need this.
3) As conditions in the PI market are changing almost on a daily basis, if intermediaries experience problems obtaining cover they should continue trying.
4) If after a full market survey the IFA can only obtain cover that does not comply with the Evidential Provision but believes that the firm has sufficient liquid assets as an alternative to the non-compliant element, the IFA should approach the FSA with regard to individual guidance.
5) If above steps fail the IFA must either: apply to temporarily suspend regulated activities by applying to vary the firm's Part IV permission by having a requirement placed on it so that IFA has further time to obtain cover; or apply to cancel the firm's Part IV permission.
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