PI insurance renewal reminds us idiots continue to prosper

I love my job. What other career offers the combination of such daily variety, the ability to facilitate meaningful changes in people’s live and a reasonable financial reward in return for the hard work?

Of course there are elements of the work I do that I dislike, even detest on occasion.

It’s pretty sucky when insurance companies screw things up. Filling in application forms can be less fun than root canal surgery.

Fielding enquiries from people who want my signature on a piece of paper in return for a Monkey so they can release the cash from their defined benefit pension scheme is not why I do what I do. I didn’t sign up for this.

And then there is our professional indemnity insurance renewal.

Our PI insurance renewal date is, happily, Valentine’s Day. That most romantic of days is ever associated in our minds with the prospect of a scary renewal premium and the inevitability of answering a series of obscure questions about products we might or might not have sold during our 22 year history.

Saint Valentine was, according to the legend, a priest of Rome who was imprisoned for succouring persecuted Christians. Perhaps we might adopt him as the Saint for persecuted Financial Planners instead?

At least the application form required to renew this insurance cover we hope to never need gives us a good indication of perceived risks in our market.

This year the focus seems to be on a number of unsurprisingly risky business areas including, but not limited to, geared investments, overseas property funds and pension liberation schemes. Quelle surprise.

A few items on the form are worth further consideration, as we think about the areas of advice we might want to avoid in the years ahead.

Any revenue derived from appointed representatives or self-employed approved persons seems to be contentious.

This makes sense, as generally speaking appointed reps and self-employed advisers are geographically distant from the authorised firm and not always subject to particularly high standards of supervision.

Within my own firm, we continue to have two self-employed approved persons, which works from the risk management perspective as they follow exactly the same processes as we do and all of the advice they deliver is constructed centrally before it is delivered to clients.

I can’t imagine a scenario where we allowed self-employed advisers to carry out their own research and present their own recommendations to clients before subjecting it to a file check at head office.

Setting up a SIPP and not giving investment advice on the assets in that pension fund is another area of concern for our insurers.

I would go as far as suggesting that any case where the financial adviser is being used by a third party as a way to access assets for investment is ridiculously high risk. The buck is always going to stop with the authorised and regulated firm, despite any assurances offered to the contrary.

If I was ever approached by an unregulated investment provider looking for an adviser to provide the pensions advice so they could flog their offshore property investments, there would be dial tone and dead air before they uttered the words ‘Brazil’, ‘off-plan’ or indeed ‘opportunity’.

Another area of concern is investment in property funds exceeding 20% of the overall portfolio value.

I’m pretty confident we’ve all heard of the concept of diversification by now and no reputable IFA is recommending a client puts more that a fifth of their portfolio into a single investment asset class.

Some of the worst mis-selling we have witnessed from the ‘bad old days’ of financial advice involved the adviser sticking everything in a single fund or asset type. At least doing this makes it easy for the Ombudsman to rule in favour of the client.

This one was interesting, especially the last point; “The sale of any geared/leveraged investment, hedge funds, overseas property, own branded collective investment funds, structured products or viatical settlements.”

Could it be that insurers are getting wise the risks of vertical integration and the approach favoured by consolidators, who fund their acquisitions by churning client assets onto their own platforms and into their own funds?

To put own branded collective investment funds in the same category as hedge funds suggests the insurers know what is coming, or at least fear what is coming, when the FCA finally gets its teeth into the way many consolidators earn their crust.

Between now and Valentine’s Day, we wait with baited breath and hope the PI insurance market hasn’t ‘hardened’ to take another bite out of our hard earned profits.

If the PI insurance gods are lenient this year, then that day spent trawling through old records to report product sales data will have been well spent. In any case, it reminds us that advising clients to give up guaranteed annuity rates or partially surrender their Investment Bonds is ‘bad’.

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One thought on “PI insurance renewal reminds us idiots continue to prosper

  • Hi Martin,

    We had a really good working relationship with our PI insurers when Chubb was in the market and were fascinated by much of what was shared with us in confidence about our industry.

    Advisers continue to accept product liability and you would expect from this that they would only handle stuff which they absolutely understood. Ongoing evidence tells us that is not the case.

    Large segments of the industry still rely on providers for their remuneration – adviser charging – so the liability issue is not going to go away anytime soon. No matter how much advisers convince themselves otherwise the PI industry sees adviser charging as commission in drag.

    Back in the days of Chubb over half of all PI renewal paperwork had to be returned for correction because it represented the adviser perception and not reality. Offsetting commission as fees was the most common issue but there were others.

    We have had our moments over PI cover but I am broadly supportive of the very difficult job they have in deciphering the nonsensical ways in which the adviser community views and presents itself. These guys have to pick up the pieces after all and there is little evidence of to support any reduction in their due diligence.

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