Financial advisers facing massive professional indemnity insurance increases

As if the recent pressure regulators were putting financial advisers under wasn’t enough, the possibility of huge increases in the cost of professional indemnity insurance looms large in the event that compensation pay-outs will increase at the hands of the financial ombudsman service.

A possible increase of the pay-out to £200,000, currently being considered by the FOS, has raised fears from experts that it will lead to the potential for the increase in the cost of professional liability insurance.

Such an increase could potentially be the last nail in the coffin for smaller IFAs that have been embattled to remain viable in the wake of the RDR-introduced business reforms.

Collegiate’s legal director Martin Archer has issued the warning that if the FOS increased the level of its awards, it would be inevitable for Collegiate’s premiums for its commercial insurance to rise accordingly.

Mr Archer cautioned that insurers are quite leery of the IFA market currently, which could lead to a mass exodus of insurance companies, resulting in a struggle for even viable IFA firms to secure proper coverage.  Some IFAs may have no choice to leave the market altogether, Mr Archer added, due to a lack of financial viability if they have the bad fortune of being hit with a serious claim against them.

Mr Archer concluded his statement by declaring that if the FOS increases its compensation pay-out, it will succeed in making a difficult situation nothing but that much worse.

A spokesman for the FOS rebutted, however, stating that any compensation increase would not be likely to effect IFAs, pointing to data that indicated that less than three tenths of one per cent of all its complaints have involved a pay-out in compensation of £100,000.  Additionally, the spokesman said, the lion’s share of these insurance claims are levied not upon advisers but instead on underwriters.

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