Navigating a Hard Professional Indemnity Market

The Financial Ombudsman’s compensation limit raise from £150,000 - £350,000 combined with a hard DB pension transfer driven Professional Indemnity Insurance (PII) Market and the December 2019 FSCS interim levy has created the perfect storm for stemming professional development within the industry. Many firms are lacking confidence in their ability to reinvest in their business and people development.

The FCA’s 2019 PII survey found 263 financial advice companies believed their PII cover was not compliant with the new FOS requirements. 

According to the FCA rules advisers should have cover for the maximum claim amount, whether through PII, spare capital or both. What we have seen since the FOS increase is an increase in excesses , restriction on DB transfer and possibility of ‘shared liability’ on claims brought against the adviser.

So, adviser’s face the dilemma of finding increased PII cover to meet the £350k limit whether through existing or new ‘top-up’ policies, or indeed capital reserves. Holding more capital then becomes a necessity but many firms find this difficult particularly as profit margins are being squeezed by the overall increasing cost of compliance.

What can we do?

We’ve seen many industry commentators calling for the abolishment of PII altogether and replace with an industry tithe across all market participants. This may be a solution but PII will not change anytime soon so it’s important for advisers to play to their strengths here. They can evidence the hard work they are placing into meeting client needs via:

1. Back office systems: Ensuring business, client management, activities, tasks, diary management and workflows systems and controls are streamlined and all staff are aligned to good working practice in serving their client’s needs
2. RegTech: If adviser firms can prove to PII underwriters that they comply with all the relevant regulatory rules, procedures, systems and controls then this will go a long way for underwriters to start having more faith in the firm and assessing the business not the market risk. RegTech can help here by providing quality Management Information and data (for example like a credit score does for individuals) so underwriters are confident firms are walking their talk when it comes to their annual PII applications
3. Soft Skills: The FCA’s Director of Life Insurance and Financial Advice Supervision Debbie Gupta recently pointed out it is those advisers who can prove clients are choosing the right solutions to fit their needs and objectives and capturing the soft facts to contextualise the client story who can demonstrate they are doing a great job for their clients and thus gain better PII renewal rates

In essence it’s all about risk management and adviser firm’s ability to identify, manage and monitor on-going risks. The FCA classify risk as “the combination of impact (the potential harm that could be caused) and probability (the likelihood of the particular issue or event occurring).” Thus by applying technology and soft skills, adviser firms can ensure they have a second and third line of defence to prove to both their PII underwriters and  regulator they operate a sound professional practice.

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