Over the past few years financial advisers have seen a significant tightening of regulatory oversight by the Financial Conduct Authority.
While the professional indemnity insurance market for financial advisers has always been a notoriously challenging place, there have recently been prominent cases of enforcement by the FCA, and an increase in the number of supervisory visits.
Meanwhile, changes such as the enhanced consumer duty regime have significantly increased the regulatory and reporting requirements for IFAs which they are supervised against.
The facts of these changes are familiar ground to most financial advisers, who have lived the changes themselves, and seen the personal impacts in terms of requirements for additional CPD or even retaking of exams.
However, this change of landscape in the UK has also led to an escalation in financial advisers’ PII premiums.
Insurers have become more cautious in underwriting PI policies because of a related uptick in claims. Caution has also led to some providers exiting the market, which has meant there is a shrinking pool of providers willing to insure IFAs.
Why is PII so hard to source?
Several factors contribute to the challenges faced by advisers.
The first is, quite simply, rising claims, especially for defined benefit pension transfers and investment mis-selling. Although this is straightforward to understand, it is difficult to mitigate against.
The market dynamics mean there is also limited competition. Only a handful of insurers operate in this space, as opposed to other industries where PII is required. In many of these there can be up to 100 insurers actively selling PI cover.
In a further move that has reduced insurer appetite, the FCA increased the limits for Financial Ombudsman Service awards by 10 per cent in April 2023, to £415,000.
The Fos claims process has also been simplified and to a certain extent targeted by lawyers.
In spite of all of this, IFAs must maintain PI cover to protect consumers and uphold professional standards. This has increasingly become a challenge for smaller firms.
Tips on getting PII
There are some simple things that you can do to make the buying of PI insurance flow more smoothly.
The first is to take time to engage with a specialist PI broker, rather than a generalist who might mainly sell motor insurance. The specialists are more likely to have the relationships with active insurers and be able to have open conversations about the nature of your particular risk.
Any IFA ought to have robust risk management practices in place, either internally or through the engagement of a specialist compliance provider. However, taking time to document these properly for your insurance application will make it run more smoothly.
Finally, do not just think about PI insurance in the week before the renewal is due. To keep costs down, take time during the year to update changes to your practice or model, so that you can, on renewal, easily review your coverage to make sure it still fits regulatory requirements and to ensure it remains adequate and responsive to your needs.
