FSA may scrutinise PI insurance cover for firms

IFA consultant firms have recently implored the Financial Services Authority to more closely scrutinise professional indemnity insurance cover in order to reduce how much the Financial Services Compensation Scheme may be required to pay in the event of a failing firm.

Consultants Gillian Cardy and  Paul Nedas have recently voiced their concerns regarding professional liability insurance policy exclusions that could result in the dangerous exposure of advisers.  Costly complaints could lead to firms defaulting without adequate insurance.  This could lead to clients taking their claims to the FSCS as a result.

Mr Nedas raised serious questions in regards to how the FSA regulates business liability insurance cover.  He related an example where one adviser sold  geared traded endowment products with professional indemnity cover that excluded them specifically. The firm in question was sold to investors without cover despite the fact that its insurance had no cover for GTEPs, Mr Nedas stated.

Nedas added that investors who had raised money for the products by remortgaging their homes have no recourse but to take complaints to the FSCS instead of the Financial Ombudsman Service.  As the FSCS limits investment claims payouts to £48,000, investors are being hamstrung by not being able to access the FOS and their £100,000 compensation figure.

The compensation system set in place was leaving advisers no choice but to pay for the costs of compensating the clients of firms with insufficient cover, added Mr Nedas.

Ms Cardy also stated that there was a need for the FSA to more closely scrutinise firms’ professional indemnity insurance cover.  If firms lack proper complaint cover and the funds to pay out on any claims, the FSCS and the FSA may be left holding the bag, she cautioned.  Ms Cardy expressed her doubts on the FSA picking up on such an occurrence unless presented with a particular issue.

Ms Cardy also cautioned that a large number of advisers may be inadvertently taking up insurance cover that could turn out to be insufficient.  She pointed out that the terms of one major insurer’s cover could potentially lead to confusion.

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