Everyone wants reward without risk and as financial services is finding out this applies not just to...
Everyone wants reward without risk and as financial services is finding out this applies not just to investors but to the industry's own insurers.
With the bear market well into its second year, negative investment returns are uncovering the flaws and downsides in products. As a result providers and intermediaries are coming under closer scrutiny and professional indemnity insurance premiums are rocketing.
The pervasiveness of this threat cannot be underestimated. The FSA sets the level of cover necessary, and to be compliant brokers must find the cover. That is proving harder and harder to do and involves a greater and greater cost, and even if markets turn up again insurers' rates are unlikely to fall immediately.
Like intermediaries, insurers seek high quality, high margin business. If they perceive that can be found outside of financial services, it will be hard to persuade them back.
It also means that high quality brokerage businesses get lumped in with those up to their ears in low-quality split capital trusts, inappropriate endowment sales and ill-conceived pensions advice.
This lack of stockpicking by insurers when it comes to risk means intermediaries may find the choice of investments and products they offer clients is effectively being dictated by insurers. The splits market has a lot of problems but for the right client there are plenty of good opportunities to be had.
One bright point in all of this is that the advisers' plight seems to have reached the ear of the FSA. Quite what the upshot will be remains to be seen but as the FSA sets the insurance cover limits for brokers it must listen when brokers are unable to achieve cover necessary to remain compliant.
The regulator told Investment Week last week that it was taking a patient line with brokers facing problems, but it may have to go far further and alter limits. Complaining about the FSA and the workload it creates for the industry is a fashionable pastime but if the regulator can mitigate the effects of the present situation it will deserve plenty of praise.
Currently, Aifa, the IFA trade body with a membership of around 70% of the industry, is giving advice to brokers experiencing problems, pointing them in the direction of the few insurance companies still providing PII.
With excesses having risen so fast the insurers are effectively passing the risk of the business back to intermediaries.
In such cases it becomes ever more important to mitigate risk. This means proper paper trails and exhaustive risk declarations.
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