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FOS drops timeline question

4 February 2010

Money Marketing

by Nicole Blackmore

The Financial Ombudsman Service complaint form no longer asks consumers when they first became aware of a problem, raising fears that advisers could be hit with charges for cases falling outside FOS jurisdiction.

The ombudsman cannot consider a complaint if the complainant takes it to the FOS more than three years after they became aware, or could reasonably have been expected to be aware, of a problem.

Collegiate Claims legal director Martin Archer says: “Sensibly, the old complaint form required the claimant to provide three key dates to enable the FOS to assess whether the complaint fell within its jurisdiction, namely the date of the transaction, when they first realised there may be a problem and when they first complained.

“However, the new complaint form inexplicably no longer asks the claimant to confirm when they first realised there might be a problem. The ombudsman will no longer be alerted to whether the complaint potentially falls outside its jurisdiction under the three-year rule.

“The cynics among us will therefore conclude the ombudsman wishes to adopt a ’Nelsonian blind eye’ to the limitation issues and is trying to investigate claims that it otherwise, upon proper enquiry, would have no jurisdiction over.”

An FOS spokesman says: “It was found that consumers were misunderstanding this question and routinely were putting inaccurate information in the box. Often the financial businesses involved had more accurate records of when a consumer had first become aware of their right to complain.

“We can confirm that nothing has changed in terms of the ombudsman process or the time limits that apply to the ombudsman’s consideration of complaints. Where it is clear that a consumer is out of time to bring a complaint to the ombudsman service, the firm involved will not be charged a case fee.”

Exams could pay off with lower PI rates

Money Marketing

28 January 2010

Nicole Blackmore

Advisers who sit written QCF level four exams may get more favourable professional indemnity insurance terms to those who sit alternative assessments, according to PYV.

Managing director Neil Pointon says if written exams are perceived to be more thorough, underwriters may offer better terms to those advisers.

He says: “If there is an argument that written qualifications are a better route to higher qualifications, then underwriters will look to reflect that.”

Pointon adds that advisers who achieve QCF level four through alternative assessments will still receive better terms than they do currently.

He says: “I do not think underwriters will penalise advisers for taking the alternative assessment route because it is still an improvement on the current minimum qualification. But if an adviser has the full written qualification, I am sure that the broker would represent that to underwriters to get better terms.”

Collegiate Management Services head of underwriting Richard Turnbull agrees that advisers with written exams might receive more favourable terms if it is considered the superior route to QCF level four. He says: “It is fair to say that if a particular method of assessment is considered better, that will be reflected in the rates offered to advisers.”

Evolve Financial Planning director Jason Witcombe says: “I think that is fair, it might be an incentive for advisers to get QCF level four via written exams if they want lower PII costs. Firms will have to weigh up whether those savings are of substantial benefit.”

Highclere Financial Services partner Alan Lakey says: “I would not have thought alternative assessments would be a weaker option. In some cases, it may be a more subjective assessment than written exams.”

Adviser PII price hike 'to hit in 2010'

IFAonline

Author: Scott Sinclair

A forecasted 50% hike in the cost of professional indemnity insurance (PII) is yet to filter through to the industry but will do so during 2010, a leading underwriter says.

London-based insurer Collegiate last year warned of a significant increase in PII costs for financial advisers as a result of increased claims brought about by heavy drops in investment returns.

Although it is yet to see significant price shifts across the industry, it expects that to change during the next year.

Claims have been through the roof, as you would expect really with investment returns down 40%," underwriting director Richard Turnbull says. "But I don't think it has really filtered through yet."

"We said there would be a 50% increase in PII costs and I still think that will be the case."

"The perception of an IFA's advice is very clearly linked to the investment return and, although there has been a mini rally, we are still 30% down on 2007."

Turnbull says he expects the financial sector to see "another Lehman Brothers-type collapse" in 2010, potentially bringing with it a flood of new claims against advisers.

But he is unsure whether advisers have yet to adopt what he calls "better defences" to protect themselves against client complaints and claims. "We'll know more in a year," he says.

Last August Collegiate, which has both underwriting and claims arms and says it insures more than 15% of the UK IFA population, said the number of claims it processed had doubled in the previous 18 months.

It also criticised some PI insurers, as well as trade associations and compliance providers, for being unclear about which exclusions some policies feature and "emphasising price above coverage".

But Turnbull says he has not noticed any major activity on the exclusions front, adding: "Insurers can have whatever exclusions they want".

PI firms dispute block notification advice

Nicole Blackmore

Money Marketing

Professional indemnity insurance specialists have warned IFAs to speak to their PI brokers before sending block notifications to their insurers.

Block notifications involve advisers sending a list of clients who may be affected by particular circumstances to their insurer before complaints arise.

Law firm Regulatory Legal partner Gareth Fatchett, who is offering a block notification service to IFAs, says where situations arise, such as the collapse of Lehman, advisers are obliged to notify their insurer of any clients they have in Lehman-backed structured products.

Fatchett says: “This is not discretionary, IFAs must block-notify their insurer of any circumstance that may lead to complaints, otherwise claims that arise will not be covered by their insurance.”

But Collegiate underwriting director Richard Turnbull says he has seen a marked increase in claim management and legal firms contacting IFAs about block notifications in the past few weeks and warns IFAs should not contact their insurer before speaking to their PI broker. He says:

Rather than pay a lawyer for advice over block notifications, take advice from an insurance professional. If you don’t, you could jeopardise your cover.”

PYV managing director Neil Pointon says: “IFAs should first speak to their broker about any problems so they do not jeopardise their policy or renewal at a later date.”

Structured Investment Products

Mark Gibbon

Managaing Director, Collegiate Group

The recent FSA guidance raises some potentially far reaching issues for the IFA industry. Clearly there will be a debate on the reasonableness of the FSA producing this detailed guidance as to what the appropriate standards are that the profession ought to have applied. Surely there should have been proper consultation with the profession as to what the relevant professional standards actually were at the time. What is, however, clear is that the FSA have now set down a marker for advisers as to what they consider the standards are going forward and this is an area that the profession needs to look at very closely and see its relevance beyond structured products.

Where capacity for loss is being reviewed then the FSA have said they will assume that where less than 10% of the portfolio is invested in the product they assume the investment is within the customer’s capacity for loss. If more is invested then the situation needs to be considered more carefully as to whether the proportion invested was reasonable or a reasonable justification has been made.

On the face of it the concentration argument is not limited to structured investments but applies to all products. Given the failure of Lehmans was very unlikely before the credit crunch how many other product/product providers are vulnerable to very unlikely events. It is hard to think of any product that does not have some vulnerability to a very unlikely event.

The Industry needs to have an urgent debate to determine if it is to accept that you need a good reason to invest more than 10% in one product unless a ‘good reason’ includes the cost/hassle of diversification is not appropriate to avoid the very low risk of a catastrophic event.

It is worth noting that the FSA have said that where the structured product is purchased in the customer’s name only, the value of jointly held investments should be halved and that the value of pension policies should not be included unless the investment is in the pension policy. These are both issues that should be included in any industry wide debate on the guidance issue by the FSA.

PI rates to rise due to structured probe

Money Marketing

28 October 2009

By Nicole Blackmore

PYV has warned that professional indemnity premiums and excesses could increase for all IFA firms as a result of the FSA forcing big structured product sellers to review their past business.

PYV director Ian Boscoe says underwriters will look to balance their exposure. He says: “This will affect all firms, even the smaller ones that did not deal with structured products. If underwriters are paying claims for larger firms on their book, they will have to spread the cost across the book.

“Even if there are not any significant claims for compensation, most underwriters will react anyway because they will see the review as a threat and will be concerned about potential claims.”

Threesixty has warned advisers to consult their PI insurers before reviewing their structured product back book to ensure they do not invalidate their cover.

Threesixty strategy consultant Phil Billingham says: “Advisers would do well to have a conversation with their PI insurers about what review.

Collegiate Management Services head of underwriting Richard Turnbull adds: “All good PI insurers will issue guidance on the review that does not contravene their terms of cover. I would be surprised if insurers did not want to be involved in this process from the very beginning.”

Lenders likely to lose fraud cases in court

Money Marketing

3 September

Lee Jones

Lenders hit by mortgage fraud could have little success in pursuing valuers in court due to negligent lending.

Last month, Chelsea Building Society and Bradford & Bingley revealed they had set aside a total of £312m for mortgage fraud and both signalled their intent to take action to recoup losses.

"A tsunami" of litigation action is expected in the courts but experts warn much of this may not find in lenders' favour.

Mortgage Promotions director Nick Baxter, who acts as an expert witness in mortgage litigation cases, says there is already "a massive upturn" in legal action against surveyors and solicitors. But he believes courts are unlikely to find in favour of lenders and says many cases are already being labelled as "non-transaction", whereby the lending is deemed to be so negligent that any possible fraudulent overvaluations are deemed irrelevant.

He says: "Back in the early 1990s, there were only marginal arguments for negligent lending in the mortgage fraud cases but now it is all up for grabs and lenders could lose out a second time round. I see a tsunami coming that will make the last round of mortgage fraud cases pale into insignificance."

Collegiate legal and claims director Martin Archer also predicts that lenders will have a tough time winning their cases in the courts. He argues that after the last housing crash, judges thought that lenders could have prevented frauds through better checks.

He says: "It seems that lessons have not been learned by the lenders and it will be interesting to see how the courts judge lenders' practices this time round."

PYV chief executive Neil Pointon warns that, regardless of court decisions, advisers could see their personal indemnity insurance adversely affected by the legal actions.

He says: "The news from Chelsea does raise concerns and it does not paint the industry in a good light."

Employers & Public Liability Insurance as standard

As part of our on-going commitment to provide our brokers with the best product for their clients we now include Employers Liability (EL) & Public Liability (PL) on our Professional Indemnity (PI) quotes for general professions^*

Each PI quote will automatically provide an option to take additional cover for EL and PL. This additional cover is competitively priced and designed to further enhance the market leading cover we provide. As such EL & PL in only available when bought in conjunction with a PI policy and not as a standalone product

Limits for EL are offered at £10M. Limits for PL are offered at £1M with £2M higher limits available upon request

Premiums start from £75 for each liability cover

^* PL & EL will be offered at underwriters discretion on most risks where an insured�s work is predominately of a clerical nature. This cover is not available on IFA quotes.

IFA warning as PI premiums set for 50% hike

IFAonline

Scott Sinclair

IFAs are being warned to brace themselves for a 50% hike in their Professional Indemnity (PI) insurance premiums next year as the market downturn shows little sign of abating.

The warning comes from PI underwriting giant Collegiate, which says the increase will reflect the "inevitable" rise in the number of claims against financial advisers during economic slumps.

London-based Collegiate, which has both underwriting and claims arms and says it insures more than 15% of the UK IFA population, says the number of claims it processes has doubled in the last 18 months

It also criticised some PI insurers, as well as trade associations and compliance providers, for being unclear about which exclusions some policies feature and "emphasising price above coverage"

Collegiate underwriting director Richard Turnbull says the correlation between investment performance and claim incidence is unsurprising, adding "it doesn't take a mathematician" to see what effect this will have on PI premiums.

"There are still some cheap insurers out there but my best guess would be that premium rates across all insurers have risen by an average of 50% [since the start of the recession]," he says. "They may rise by another 50% over the next 12 months."

A survey conducted by Professional Adviser in June suggested less than 10% had experienced a ‘considerable' hike in premiums this year compared with last.

However, a number of those who said prices had either slightly increased, were about the same or had fallen, admitted they had yet to renew their PI plans in 2009.

Richard Howells, intermediary sales director at Zurich UK Life and owner of Manchester-based IFA Rapport Financial Strategies, says some PI insurers may be concerned by the direction of the market and withdraw their offering.

"They might say: ‘We'll exit for three or four years and wait for things to calm down, or maybe we'll stay where we are but add a few more exclusions'," he says. "Without PI, IFAs have got to close the door."

PI insurance is designed to protect firms from the financial consequences of unsuitable advice beyond their capacity to provide cover for "general" errors and omissions.

But Collegiate's Turnbull says some PI providers are not doing enough to highlight their policy exclusions, and criticises advisers for picking cover based on price.

Key exclusions in most PI policies are insolvency and market fluctuation exclusions, both of which have taken on new significance in the wake of the collapses of Lehman Brothers last year and, more recently, Keydata.

"A number [of providers] have written policies cheaply but have not been highlighting their exclusions. I'd be a little bit worried if I was an IFA," Turnbull says. "But I don't think they are all that bothered. It is incredible some IFAs don't necessarily recommend the cheapest policies to their clients but do the opposite when choosing PI cover."

But Daniel Kelly, an associate with global PI broker Lockton, says he can understand why IFAs select cheaper policies. "Five or six years ago, PI cover was extremely expensive and the FSA had to issue waivers for some firms. But the market has softened since so prices have tumbled. I can fully understand why some advisers have taken advantage."

The FSA says the PI market "significantly hardened" in 2003 and it was forced to issue almost 1,000 waivers to firms that could not afford cover. But the introduction of the insurance mediation directive (IMD) in January 2005 ruled out any future possibility of waivers and demanded firms buy sufficient cover.

Last November, the FSA proposed firms with PI plans containing any exclusions may need to hold additional capital, dependant on their income, to cover the extra risk.

As an example, it said a firm with a relevant income of £4.7m and a PI policy with an excluded ‘business line' on which it advises, or has done so in the past, would need to hold additional capital resources of at least £67,000.

It says it received 102 responses to the consultation and will publish a policy statement in Q4 20

Use of After the Event Insurance in Asset Recovery Cases

Use of After the Event Insurance in Asset Recovery Cases

(updated version of article originally published in Recovery Magazine)

More and more commercial enterprises contemplating litigation are realising the need to manage their exposure, both to their own and their Opponent's costs. For some firms it is an astute option and for others obtaining some form of funding or after the event cover is a necessary pre-condition to progressing a claim.

Pre-existing cover

Care has to be taken in taking out the policy where there is already a "before the event" policy in existence. Recovery may also be denied if cover is taken out before the opposition has really had a chance to consider their position and decide whether or not they are opposing the claim.

ATE Cover

After the event policies are written by a relatively small market, particularly in the commercial field.

Where the claimant has limited funds at his disposal or wishes to allay concerns of his bankers or shareholders, then two alternative possible routes beckon. The first is to find a legal expense insure who offers a conditional premium, i.e. one which will not be payable unless the case succeeds at trial. In such cases the claimant's own lawyer and possibly Counsel work on a conditional fee agreement. Buying such a policy offers a good chance of recovery with limited exposure. The second choice is to find a provider who is prepared to fund the premium and possibly the lawyers' costs on a commercial basis.

A problem often arises in that there are limited funds available to pursue claim and the defendant's assets themselves are limited. There is no real prospect of recovering additional costs from any third party. Such cases offer very limited prospects of recovery. A solution to this problem may rest in insuring both sides' costs and arranging funding both for the premium and the lawyers' fees which can then get paid along the way. If the insurance premium is less than the success fee that would be charged by the lawyer, there will be more money to go round at the end of the day.

The gearing effect offered by after-the-event insurance, where there are limited funds available, can be highly beneficial. Take as an example, a case where the claimant has only £250,000 of assets. Both sides' costs are estimated to be £500,000. Clearly the action will not succeed unless the claimant is prepared to take the risk not only of losing the £250,000 in the pot but also an additional £250,000 should the case be lost. Buying say £500,000 of cover at a premium of £125,000 means that there would still be £125,000 shareholders funds, left in the pot at the end of the day. If the premium itself is insured as a disbursement [which does of course have the effect of eroding the limit of indemnity offered] then yet greater gearing and protection can be achieved.

Where there is a limited sum available for pursuing an asset, the ability to insure the premium is very beneficial. Not only costs and disbursements are met but the claimant can recover the premium under the insurance policy. Thus, the insurance cost just becomes a matter of funding. There may be an interest payment in respect of the lender's fee but otherwise for a very limited amount of money, substantial cover can be had.

For some larger cases protection can be obtained through the use of hedge funds or through assigning a claim to a third party who is prepared to fund the action in exchange for a not inconsiderable slice of any recovery. The advantages of such a system are obvious. The claimant should hopefully be able to make some recovery for his creditors without incurring any exposure himself. However:

assignments are potentially open to allegations of maintenance or champerty: (the old laws preventing disinterested parties from running or supporting cases or from profiting from a litigation in which they had no financial interest)
the product providers will tend to "cherry pick";
although because of the champerty issue. control as to whether a matter is pursued or not must rest with the assignor there will inevitable be tensions with the party who has agreed to meet the cost of running the case.
lastly, such arrangements may not be available for the run of the mill claim.

One big question is whether or not premium will be recoverable.

Section 29 of the AJA specifies:

"Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy."

A receiving party will be entitled to place evidence before the court from their insurer to demonstrate costs reasonably covered by the premium. The circumstances in which the whole premium will be recoverable will have to be determined by the courts when dealing with the individual cases.

The Courts seem to have ruled that premiums, which cover the following elements, are potentially recoverable from the paying party:

Both sides costs cover
Risk of failing to beat Part 36
Losing an interim application
Any adverse costs order
Own disbursements
The premium itself
Any shortfall of premium on assessment
Deferred premiums
Retrospective cover
The Ashworth case
Policy offered 6 months before trial
£125,000 cover BSI proposed
Premium of £46,000
Opportunity given to other side to settle
On assessment, held that retrospective premium could be recovered in full.

Section 11.10 of the relevant practice direction provides a five-part test as to whether the cost of insurance cover is reasonable:

The level and extent of the cover
The availability of any existing LEI cover
Any rebate for early settlement?
The amount of commission payable to receiving party or his solicitor of agents
Where the insurance cover is not purchased in support of a conditional fee agreement with a success fee, how its costs compares with the likely cost of funding the case with a CFA with a success fee and supporting insurance cover.

Depending on the manner in which the policy is written, premiums should therefore be recoverable.

There have been some judicial criticisms of policies where the basis of the underwriting was a percentage of own costs, which might not bear much relation to the actual risk being run. However, as long as they are reasonable, premiums payable in respect of policies where there is a fixed limit of indemnity and staged premiums should, all being well, be recoverable.

Security

On security for costs, the existence of an after the event policy may persuade a Court that it is inappropriate to award security for costs. However, security may nonetheless be ordered. Some product providers are in a position to provide security. Where that is the case that obviously gives the provider an advantage, albeit it may provoke a request for an indemnity from the Insolvency Practitioner or his lawyer in the event there is some vitiating event that means that the underlying policy of insurance is no longer valid.

Summary

To summarise, as can been seen, there are a number of providers in the insurance market place. Those with valid claims should not simply ignore the prospects of making asset recoveries on the grounds that there are no funds available to do so. Where insurance is used, claimants can take comfort from the fact that at the end of the day there may still be some money left and that not all will have been blown on keeping the lawyers happy at their expense.

PI policy exclusions leave advisers out in the cold

City Wire - 03 February 2009

Advisers could be forced to fight client complaints linked to AIG, Lehman Brothers and Kaupthing Singer & Friedlander Isle of Man (KSF IoM) alone because of loopholes in six major professional indemnity insurers’ policies.

Insurers QBE, Hiscox, Markel, Chubb and Beazley all exclude claims which relate to the insolvency of financial institutions and Quinn will not cover claims relating to the failure of an insurance company.

The policy exclusions mean advisers may have to fund their own defence against complaints to the Financial Ombudsman Service relating to Lehman-backed structured products, the AIG Life Enhanced fund and money deposited in KSF IoM through offshore insurance bonds.

Hiscox director of business assurance Gary Head said: ‘We cannot quantify third-party insolvency as it is impossible to know which banks, funds and other vehicles our financial adviser clients are recommending.

‘It’s important to us that customers are crystal clear about what we do and do not cover – our policies are in plain English and any exclusions are clearly listed.’

Collegiate does cover third-party insolvency and head of underwriting Richard Turnbull said he informed the Financial Services Authority (FSA) of other insurers’ clauses four-years ago.

‘I see a lot of papers come across my desk with people who have exposure… it is quite a big issue,’ said Turnbull, who added that insolvency exclusions could break the FSA rules on professional indemnity insurance by unreasonably restricting cover.

The FSA said it could not clarify if the exclusions broke its rules.

Newcastle-based adviser Ian Lowes did not think a claim could arise from the collapse of a bank unless the advice had been negligent.

‘All advisers should be making sure clients are clear on the risks,’ he said. ‘What is the point of professional indemnity insurance? It only covers negligent advice,’ he added.

PI Warning On Collapse Cover

Money Marketing- 29-Jan-2009

Advisers have been warned to check their professional indemnity insurance policy for any exclusions over the collapse of a bank or financial institution.

At least three insurers, Hiscox, Markel and Chubb, have standard policy exclusions for claims arising from the insolvency of a bank or other financial institution

Hiscox PI underwriting manager Justin Bowen says this is a standard exclusion in the company's policies.

He says: "We perceive it to be a risk outside of an IFA's control. The price we charge is based on the work they are doing, not a third party."

Collegiate Management Services does not have an insolvency exclusion written into its policy. Legal and claims director Martin Archer says: "If the FSA were aware of that exclusion, I imagine they would be concerned about it."

Philip J Milton & Co director Philip Milton says it is wrong that advisers are not covered from claims that may arise as a knock-on effect of a financial institution going bust

He says: "It is not something that you would ever have expected to happen. The question is whether advisers realise this exclusion exists on their policy. They may want to make sure when the time comes to reinsure that they have cover for this."

The FSA was unable to clarify whether such an exclusion would be considered unreasonable by the regulator or whether such a PII policy would be considered adequate cover for an IFA

PYV director Robert Bass says: "Professional indemnity insurance is not there to guarantee financial institutions, it is there to guarantee an adviser against negligent advice."

The Financial Services Compensation Scheme limits payouts to £50,000 for bank deposits, £48,000 for investments and 100 per cent of the first £2,000 and 90 per cent of the remaining for insurers. Advisers have expressed concern that they could face claims for sums above these limits.

PI Insurers criticised over TCF feedback claims

New Model Adviser - 24th November 2008

Professional indemnity (PI) insurance underwriters who say soliciting treating customers fairly (TCF) feedback could inflate premiums or render cover invalid by inviting complaints have come under fire, writes Richard Harris.

Software company FinQS said that encouraging IFAs not to gather feedback was ‘ridiculous’. Phil Reed, operations director at FinQS which developed The TCF Centre to automate feedback via online questionnaires, said the Financial Services Authority’s (FSA) broad definition of a complaint – ‘any expression of dissatisfaction, whether oral or written’ – was partly to blame.

But he said underwriters were holding advisers ‘to ransom’ over the issue, and said networks and support services companies such as SimplyBiz and Bankhall that advised against gathering feedback were not acting on behalf of their members.

The FSA policy department admitted the distinction between a complaint and an expression of dissatisfaction was ’fluid’; but said that, ‘only in unusual circumstances would feedback on customer satisfaction questionnaires constitute a complaint’.

One Underwriter, Collegiate, said questionnaires should be agreed with insurers and sent out soon after the advice was given, but supported TCF questionnaires in principle. ’Any initiative to encourage treating your customers fairly can only be positive and any insurer currently involved in the IFA PI insurance market has to embrace this and adapt’, said Collegiate underwriting director Richard Turnbull.

But Sifa compliance director Ian Cockrill said not all underwriters agreed. ‘It’s a legally dicey area-insurers being what they are they will always use it as an excuse to invalidate cover.

Collegiate says Lehman may force PI rise

PI insurer Collegiate Management Services has warned that recent problems with Lehman Brothers-backed structured products could see PI increases.

Legal and claims director Martin Archer says the problems could have a "disproportionate" effect on professional indemnity insurance bec- ause of concerns about how the ombudsman will react.

Archer says: "The starting position for IFAs was that structured products backed by an A+ bank were low risk, suitable for low-risk consumers. Many would argue that it is unfair for advisers to bear the responsibility because you don't expect A+ banks to fall over. But we have an ombudsman regime that is very sympathetic to consumers."

Archer says it is unclear to what extent IFAs were expec-ted to flag up counterparty risk to clients. He says: "The risk is covered in the key features document and even the FSA has said it does not want advisers to painstakingly replicate all the information in that document so it is a difficult issue.

"But it is human nature that claims will arise. There have been a lot of people that were sold something labelled low risk and which have suffered potentially catastrophic con-sequences.

"This will be potentially worrying for some insurers and I would not be surprised if some want to know how many structured products advisers are investing their clients in."

Lowes Financial Management managing director Ian Lowes says it is the responsibility of advisers to ensure that their clients understand the risks involved in structured products. He says: "Advisers should have made the risks clear in their reason why letters to investors, who would also have received the FSA Capital At Risk brochure.

"No one could have foreseen the loss but as long as all the right warnings were given about the associated risks, it is a case of just moving on. If the risks were not properly stated, the ombudsman may find in favour of the client."

Source: Money Marketing

IFAs warned of PI risks in client surveys

Professional indemnity insurers may increase premiums for IFA firms which send out treating customers fairly questionnaires to clients as it could lead to a rise in complaints.

PYV chief executive Neil Pointon says firms need to be aware of the consequences of poorly constructed client questionnaires as critical responses may be classed as complaints under FSA rules.

Part of the FSA's definition of a complaint is "any expression of dissatisfaction, whether oral or written".

Pointon says firms must investigate any instance where a customer expresses discontent in a questionnaire, which in some cases may lead to a claim.

He says: "If a questionnaire elicits more claims than you would normally have, that will be reflected in your premium. There could be a rebound effect in terms of excesses and term conditions imposed on policies."

Pointon says TCF questionnaires should be approved by an IFA firm's underwriter.

Collegiate Management Services legal and claims director Martin Archer says most compliance consultants will recommend that firms agree questions with their insurer.

He says: "We get a lot of questionnaires and sometimes we approve them and sometimes we request amendments. They are a legitimate part of an adviser's business but they should not be sent to clients who have not done any business for years.

"If you are inviting people to answer questionnaires who received advice a long time ago, then you are more likely to pick up responses from those who are dissatisfied."

Source: Money Marketing

Mortgage Brokers in Firing Line

Insurance Day 9th April 2008

BRITAIN’S sub-prime mortgage borrowers at risk of repossession are to seek financial redress via mortgage brokers’ professional indemnity policies (PI).

Borrowers who lost sizeable deposits and incurred heavy bank debt after being sold "aggressive" mortgage loans will round on mortgage brokers principally linked to their woes.

PI brokers told Insurance Day recent regulatory reforms have left mortgage brokers exposed to claims filed through the Financial Ombudsman Service (FOS).

One expert said a wave of claims is "widely expected" and that mortgage brokers are "touching the iceberg". The Citizens Advice Bureau and the FOS have both noted a rapid surge in complaints made against mortgage brokers last year.

Martin Archer, claims director at Collegiate, said PI rates are hardening rapidly amid fears that the FOS will back consumers in deteriorating market conditions. Archer said: "In the last property recession we saw claims going against the accountants but not significantly against mortgage brokers.

"Mortgage brokers are regulated now. Also, in terms of the ease with which consumers can claim compensation, there are no barriers to entry such as legal fees. Brokers will ultimately have to advise the consumer of the FOS’s free service to resolve claims."

"Claims that would not have been experienced in the last recession will become commonplace now," he said.

Archer pointed out that banks may align themselves with consumers on this issue, further fuelling the claims trend in an effort to get back mortgage loans.

Restitution under FOS may clear mortgage-related bank debt. "There could be a situation where banks themselves may encourage customers to complain to mortgage brokers, hopeful of full repayment of the customers mortgage debt through the financial ombudsman service," Archer explained. "This is not as far-fetched as it may seem now."

Meanwhile, the FOS has spurred unrest after releasing complaints figures against mortgage brokers last year.

Tony Boorman, decisions director and principal ombudsman, told Britain’s Council of Mortgage Lenders: "First, the volume of [mortgage] cases has increased markedly - up some 50% on last year [2006-07] when we received 4,366 mortgage cases [and that was an increase on the previous year]."

PI piling up for mortgage firms

Money Marketing 07 Feb 2008

Professional indemnity insurance brokers and insurers are warning that market conditions and the FSA's spotlight on mortgage advice mean that PI premiums could soar for some mortgage advisers.

PYV chief executive Neil Pointon says he expects that this year's rates will be double or even quadruple last year's premiums.

He considers that predicted falls in property prices, the credit crunch, the Northern Rock debacle and the threat of recession will increase the risk of claims and the price of PI insurance.

Pointon says: "When the markets start to fall, people have a look around for those who have been involved in advising them in this area and unfortunately mortgage brokers, similarly to financial advisers, surveyors, lawyers, even accountants, are all in the firing line.

"The threat of litigation is here and professional indemnity insurers are bound to have a look at the rates they are charging."

Pointon believes that some mortgage intermediaries will find it difficult to maintain cover with their same insurer this year. He says: "Underwriters will actually look to prune their account because the amount of premium income that this sector by itself generates is minimal compared with the fear of the size of the exposure."

But he adds that last year the smallest mortgage broker could have got annual cover for a premium of below £200 whereas the smallest IFA firm would have been paying around £2,000.

He says: "So if rates do increase, say they double or quadruple, then there is still a way for them to go before they catch up with what IFAs are already paying. If they cannot afford to pay those premiums, then it is questionable whether they are a solvent business in the first place."

Collegiate underwriting director Richard Turnbull says the unknown factor is how regulatory changes will affect the market.

He says: "Although we have had fluctuations in house prices and credit crunches before, what we have not had is the FSA regulating mortgage brokers and complaints being dealt with by the Financial Ombudsman Service.

"They are still finding their feet with regard to regulating mortgage brokers and dealing with claims. It is an unknown element that people are finding hard to price, which is why you are finding incredible uncertainty in the pricing of premiums."

Turnbull adds that he is seeing massive variations in PI prices being quoted.

He says:"Some people are still quoting quite cheap rates of 0.3 per cent turnover but some are quoting £50,000 with £50,000 excesses on guys turning over £1m so that is a 5 per cent rate."

" I suggest that mortgage brokers get their renewal terms and if, in their opinion, they are unreasonable they should shop around a little bit."

" As far as I am aware, the schemes that insure the majority of mortgage brokers are still active in the market. Although they may hike premiums to a certain extent, I am not aware of anyone pulling out of the market or mass 100 per cent hikes in rates yet."

Mortgage Force managing director Rob Clifford believes that hardening in the PI market is inevitable. He says PI insurers are getting nervous about failings in the intermediary market over treating customers fairly and the increased FSA focus on affordability and responsible lending.

Clifford says: " All of that increased regulatory focus and pressure on the intermediary market can generate more consumer action, which ultimately results in PI claims."

He says there is an growing culture of compensation and many consumers are jumping on the litigation bandwagon. But he believes there is no need to panic, saying: "I am not hearing from small firms that it is becoming dramatically more expensive or impossible. Arguably, brokers who are completely focused on the more contentious players in the market, such as self-certification or sub-prime, face a risk of consumer criticism and negligence claims and so I expect their premiums to reflect that particular business mix."

But The Mortgage Practitioner sole practitioner Danny Lovey is sceptical that premiums will rise this year, saying there is no hard evidence that the rate of claims is on the increase. He says: "I think there is speculation that premiums may go up, rather than evidence that they will. What people are saying is that because things are more difficult for people, we are going to get more claims but if everyone is doing their job properly, that should not happen.

"Just because there will be a few people out there having a difficult time who may want to try and put it on to their mortgage intermediaries, does not necessarily mean they will be successful. If you have done your job properly you cannot be held responsible if their circumstances change. If you have been badly advised at the beginning, then that is a different matter altogether."

Towergate Lifestyle managing director Roger Crowther says: "We have no evidence to suggest that professional indemnity premiums will increase to unacceptable levels and believe that such comments are simply marketing hype. Over the last 10 years, we have worked hard to prevent huge swings in premium levels to ensure that brokers benefit from pricing stability and can budget for the coming year. Premiums throughout 2007 have fallen but are not sustainable and, as a result, are returning to 2005/06 levels."

Association of Mortgage Intermediaries director Richard Farr believes premiums will rise but blames the media for "sensational headlines" that he says have created unnecessary hype and will contribute to rate increases.

He says: "National sentiment is going to have an effect on the underwriters of PI. You have to be realistic, filter out the hype and concentrate on the hard facts.

"Underwriters are saying they will increase premiums but they argue that the rates were very low to begin with."

Collegiate Group appoints Mark Gibbon as Managing Director

Collegiate is pleased to announce Mark Gibbon’s appointment as Managing Director of Collegiate Management Services Limited.

Mark, previously Collegiate’s Group Finance Director, will be ably aided and assisted by Martin Archer, Claims and Legal Director and Richard Turnbull Underwriting Director.

Having been Managing Director of Collegiate from the beginning, Anthony Howe will become non-executive Chairman.

The Group continues to benefit from the highest quality underwriting capacity support with Canopius Managing Agents providing capacity for IFAs and Hiscox Insurance providing the capacity for all other professions.

Mortgage Brokers Face Massive PI Rise

Money Marketing -20-Dec-2007

Mortgage brokers could see their professional indemnity insurance premiums quadruple in the new year as a result of uncertainty in market conditions.

Industry sources suggest that mortgage brokers, who currently can get PI cover for around £200 a year, will have to pay as much as £800 next year.

One source says some mortgage brokers have been declined cover and one client was charged over 30 times the premium paid previously.

Law firm Browne Jacobson considers that the sub-prime and impaired-credit markets will have the greatest number of claims next year.

Collegiate underwriting director Richard Turnbull says with the recent FSA crackdown on the mortgage market and an expected fall in property prices, there is a strong possibility that PI rates for mortgage brokers will increase significantly.

He says: "There is great uncertainty over what is going to happen and we are already seeing massive variations in prices quoted."

Even if there is a substantial increase, mortgage brokers will still have lower rates than IFAs who pay an average of around £2,000 a year. PI brokers suggest that IFA rates will remain steady.

PYV chief executive Neil Pointon says: "Even if PI rates do rise for mortgage brokers, the cover would still be extremely good value for money. We can still deliver, even in these difficult market conditions."

The Mortgage Practitioner sole practitioner Danny Lovey says: "It has not been proven there will be more claims."

Collegiate relocates to Mint House

We are pleased to announce that we have now relocated to prestigious new offices at the edge of the city.

You will now find us at:

5^th Floor
Mint House
77 Mansell Street
London
E1 8FE

Telephone: 020 7459 3456

Facsimile: 020 7459 3455

All direct lines and e-mail addresses remain the same.

Collegiate's 21st Birthday Quiz

Thanks to all those who took part in our Birthday Quiz… congratulations to Danny of Shore Jelf Professions brokers who wins the champagne.

The four runners up were who each receive a bottle of wine are:

Warren Putt PYV
John Lunn, Lark Insurance
Simon Ashmore, Bell & Co Brokers
Patrick Bullen-Smith, Hera Indemnity

Collegiate Quiz

1. What was the car of the year in 1986?

Make Ford Model Granada Scorpio

2. What was the number 1 on the 17^th October1986? (Artist & Title)

Artist Madonna / Nick Berry Title True Blue / Every Loser Wins^**

3. Who had a hand in England’s 1986 world cup defeat?

Maradona

4. Who completed the league and FA cup double in 1986?

Liverpool

5. Which British journalist was kidnapped in Beirut on April 17^th 1986?

John McCarthy

6. Which Welsh soprano was born on February 21^st 1986?

Charlotte Church

7. What Colloquial name was given to the radical reform of the London Stock Exchange, which took place in October 1986?

Big Bang

8. Who in 1986 was the first male to win the British Rear of the Year Award?

Michael Barrymore

9. Which space shuttle exploded 73 seconds into its launch on Jan 28^th 1986?

Challenger

10. Which family movie featuring David Bowie was released in 1986?

Labyrinth

^**As there are reliable charts available showing both answers we have decided to accept Madonna or Nick Berry

Use of After The Event Insurance in Asset Recovery Cases

Recovery Magazine October 2007 Written by Tony Howe, Managing Director, Collegiate Group

More and more commercial enterprises contemplating litigation are realising the need to manage their exposure, both to their own and their Opponent’s costs. For some firms it is an astute option and for others obtaining some form of funding or after the event cover is a necessary pre-condition to progressing a claim.

After the event policies are written by a relatively small market, particularly in the commercial field. For some larger cases protection can be obtained through the use of hedge funds or through assigning a claim to a third party who is prepared to fund the action in exchange for a not inconsiderable slice of any recovery. The advantages of such a system are obvious. The Insolvency Practitioner should hopefully be able to make some recovery for his creditors without incurring any exposure himself. However:

assignments are potentially open to allegations of maintenance of champerty:

the product providers will tend to “cherry pick”;

control as to whether a matter is pursued or not will tend to rest with the assignee rather than the Insolvency Practitioner whose claim it was in the first place;

lastly, such arrangements may not be available for the run of the mill claim.

Where the Insolvency Practitioner has limited funds at his disposal then two alternative possible routes beckon. The first is to find an ATE provider who offers a conditional premium, i.e. one will not be payable unless the case succeeds at trial. In such cases the Insolvency Practitioner’s own lawyer and possibly Counsel are working on a conditional fee agreement. Buying such a policy offers a good chance of recovery with limited exposure. The second choice is to find a provider who is prepared to fund the premium and possibly the lawyers’ costs on a commercial basis.

A problem often arises in that there are limited funds available to pursue the assets and the assets themselves are limited, where there is no real prospect of recovering additional costs from any third party. In such cases, the prospect of pursuing a claim where the proceeds have to pay not only a lawyer and his success fee but also an insurance premium is not attractive. Such cases offer very limited prospects for the Insolvency Practitioner himself to get paid and the action is supposed to be for the benefit of the creditors who would like to see some result that actually benefits them. A solution to this problem may rest in insuring both sides’ costs and arranging funding both for the premium and hopefully the lawyers’ fees so that they can get paid along the way. The advantage here is that if the insurance premium is less than the success fee that would be charged by the lawyer, then there will be more money to go round at the end of the day. The creditors actually benefit from such an arrangement.

The gearing effect offered by after-the-event insurance, where there are limited funds available, can be highly beneficial. Take as an example, a case where there is say £250,000 of assets. Both sides’ costs are estimated to be £500,000. Clearly the action will not succeed unless creditors are prepared to take the risk not only of losing the £250,000 in the pot but also an additional £250,000 should the case be lost. Buying say £500,000 of cover at a premium of £125,000 means that there would still be £125,000 left in the pot at the end of the day. If the premium itself is insured as a disbursement which does of course have the effect of eroding the limit of indemnity offered] then even in a limited asset situation substantial gearing will have been achieved.

Where there is a limited sum available for pursuing an asset, the ability to insure the premium can also be beneficial. Not only costs and disbursements are met but the Insolvency Practitioner can recover the premium under the insurance policy. Thus, the insurance cost just becomes a matter of funding. There may be an interest payment in respect of the lender’s fee but otherwise there is a very substantial gearing where, for a very limited amount of money, substantial cover can be had.

One big question is whether or not premium will be recoverable.

Section 29 of the AJA specifies:

“Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy.”

The Courts seem to have ruled that premiums, which cover the following elements, are potentially recoverable from the paying party:

Both sides costs cover

Risk of failing to beat Part 36

Losing an interim application

Any adverse costs order

Own disbursements

The premium itself

Any shortfall of premium on assessment

Deferred premiums

Retrospective cover

The Ashworth case

Policy offered 6 months before trial

£125,000 cover BSI proposed

Premium of £46,000

Opportunity given to other side to settle

On assessment, held that retrospective premium could be recovered in full.

Section 11.10 of the relevant practice direction provides a five-part test as to whether the cost of insurance cover is reasonable:

The level and extent of the cover

The availability of any existing LEI cover

Any rebate for early settlement?

The amount of commission payable to receiving party or his solicitor of agents

Where the insurance cover is not purchased in support of a conditional fee agreement with a success fee, how its costs compares with the likely cost of funding the case with a CFA with a success fee and supporting insurance cover.

Depending on the manner in which the policy is written, premiums should therefore be recoverable.

Care has to be taken in not taking out the policy where there is already a “before the event” policy in existence. Recovery may also be denied if cover is taken out before the opposition has really had a chance to consider their position and decide whether or not they are opposing the claim. The premium on such a policy taken out at that stage may well be objected to, although if the case proceeds to trial and the defendant loses it is hard to see why that should be the case.

To summarise, as can been seen, there are a number of providers in the insurance market place. Insolvency Practitioners should not simply ignore the prospects of making asset recoveries on the grounds that there are no funds available to do so. Where insurance is used, creditors can take comfort from the fact that at the end of the day there may still be some money left and that not all will have been blown on keeping the lawyers happy at their expense.

Article � Discussion Paper 2007 for Review of the Prudential Rules for Personal Investment Firms

The FSA has come under a barrage of criticism over its discussion paper on the prudential rules for personal investment firms. In particular the lack of any evidence for its proposition that there is linkage between capital adequacy and the likelihood of mis-selling and the generally confused and often conflicting thinking that is prevalent throughout the entire discussion paper.

Whilst the paper certainly is lacking in evidence and confused and contradictory, I for one believe that the FSA should be given some slack. Too often the FSA have produced discussion papers far too late in the day, when they have already gathered extensive evidence on the point and in reality reached a conclusive view as to how they wish to proceed. We then have the charade of a consultation process where the ultimate outcome is largely pre-determined and the most that one can really expect from responding is to make minor alterations to the edges rather than materially alter the central thrust of the FSA’s plans.

Here it is patently obvious that the FSA have hardly thought about the issue at all and have cobbled together some preliminary thoughts and ideas of “stakeholders” into a passable document for discussion purposes, without any real idea as to where these discussions may lead them. This is exactly the sort of discussion paper we need from the FSA.

Anyone who cares about the survival of small firms of professional financial advisers really ought to take an hour out of their busy lives to read the 42 pages of the consultation paper and make their voice heard. Whilst IFA’s lack the capital of many of the other vested interests, with their sophisticated political and publicity departments, there are 5,000 firms out there who are directly regulated by the FSA and who will be affected by the outcome of this. Reading between the lines 83% (those with 5 advisers or fewer) could well be put to the sword and really ought to put pen to paper. It should be perfectly possible to convince the FSA that there is no need to squeeze out the smaller firm and if we fail to do so it will be for want of trying rather than losing the argument itself.

So what prompted the discussion paper? According to the overview “a number of stakeholders have expressed concern to us that the current Prudential rules are not fit for purpose”. No doubt most of us will finger the providers as the main peddlers of these concerns. However my own suspicion is that the FSA themselves see small IFA’s as a problem. We should not underestimate a regulators desire for neatness, order and control irrespective of whether neatness, order and control actually delivers a better outcome on their primary objectives.

Undoubtedly the regulation of small firms is a patchy mess. The FSA’s shift to risk based regulation has meant that small IFA’s more or less slip completely under the regulatory radar unless something starts to go majorly wrong with the firm. The FSA cannot realistically provide much by way of effective monitoring of 5,000 small firms. They know that from a cost benefit analysis it makes no sense to increase the monitoring of these firms as the majority are perfectly well run and any extra monitoring is not likely in any event to identify those that aren’t. That is not to say however that they do not recognise the potential for them to be embarrassed by a small rogue firm. However much it maybe entirely legitimate for the FSA to say that their model is not looking for a no failure regime, the tabloid journalists will drag them over hot coals if a number of clients end up being damaged by a small firm that was in reality not subject to any real regulatory constraints at all.

A neat and tidy solution for the FSA is to simply drive the 4,150 firms with 5 advisers or less out of their independence and into larger entities, leaving them with perhaps 2,000 larger firms which would be easier for them to manage. The alternatives of leaving it messy but effective needs to be championed.

Turning to the meat of the paper, in Section 3 they concentrate on the theory of market failure. Here the FSA point to the information asymmetry between consumers and advisers and the perceived conflict of interest inherent in commission remuneration. As the claims director of Collegiate Claims I have had the pleasure of overseeing the management of tens of thousands of professional indemnity claims against independent financial advisers on behalf of our client underwriters. Undoubtedly a sizeable minority have had a flavour of commission bias. The most often cited examples are Pension Review and endowment mis-selling. In both cases the main alternative option, the occupational scheme and the repayment mortgage respectively would normally produce significantly less remuneration, if any for the adviser.

Had occupational schemes paid a fee to every advisers who managed to persuade someone to join the occupational scheme I have no doubt many more employees would have done so. We cannot however simply ignore the fact that at the time the government of the day was trying to achieve the exact opposite and had itself set out on a campaign to persuade its own public sector employees to go down the personal pension route. Equally, at the time the majority of endowment policies were being sold, endowments were genuinely seen to be an appropriate low risk way of financing the repayment of your mortgage. In the vast majority of cases where it is alleged that there was commission bias the reality is that the adviser was confronted with two options he felt were equally suitable and that bias, if it has been there, has been to then choose the one that was in his own financial interest. Rarely is it, as portrayed in the media, where an adviser cynically and knowingly recommends an inappropriate product purely for the commission.

This is important to recognise as in my experience the problem of commission bias is overstated. It did not cause the Pension Review and endowment mis-selling. They were caused by ignorance, poor training and a healthy dose of twenty-twenty hindsight. Yes, in my opinion underwriters are right to consider fee remunerated advisers a better risk, but it is wrong to suggest that commission remunerated advisers are a poor risk.

The vast majority of small IFA’s are decent, honest, hardworking professionals seeking to do the best they can for their clients. Contrary to the FSA’s assertion, the advisers incentive to maximise his own income is not only loosely linked to the customers financial outcome. A small business well understands that their reputation is absolutely crucial. Whilst a satisfied customer may be a great source of referral work, a dis-satisfied customer will do a lot of damage to their reputation in their community. The majority of IFA’s that I have dealt with during the various mis-sellings scandals were horrified and bewildered by the vilification of the industry and on a personal level often acutely embarrassed as well, as they had recommended the tarnished product to their own close family and friends.

Quite understandably they felt they were being unfairly judged by the retrospective imposition of standards that were not “state of the art” at the time. Whatever your views are on what standard ought to have been expected of professionals at the time, it is simply not the case that these people were dishonest. It is I think exceedingly important to recognise that the scandals were not primarily caused by commission biased dishonesty, but by poor training and professional standards.

Great strides have been made by the FSA and the industry to improve those core standards and principles. I am not suggesting it would not be better if all advice was given on a fee basis as there is some commission bias, but it is dangerous for the FSA to get this bias out of proportion. Until the majority of the British public is ready to pay up front fees for advice there will be some commission bias, but it is simply not the case that small firms fighting to establish a reputation in their area are going to make unsuitable recommendations because of commission bias.

That said, there is however still a lot of compensation being paid. In 2005/6 the target firms paid redress of £104 million out to 35,290 claimants with the FSCS paying out an additional £108 million.

The FSA make the point that they do currently impose conduct of business and Prudential regulation on the target firms, but go on to state that the evidence of the significant volume of consumer complaints suggests that the current rules do not entirely solve the relevant market failures. The paper asks us whether we agree with that analysis, but in truth from those bold numbers it is not possible to draw any conclusion.

The obvious omissions are any comparisons with the volume of business written. Certainly £200 + million is not to be sneezed at, but what volume of business does that represent? And how does that compare to the direct providers? I have no doubt at all that the IFA sector would come out smelling of roses in any comparison with the direct sector and that there is no evidential basis on which to link low capital adequacy to a higher risk of mis-selling. Further whilst no details are given I suspect that the majority of the compensation payments relate to advice given more than 5 years ago.

Enormous strides have been made by the industry to improve professionalism. The benefit of these developments however do take a number of years to bed into the system and then a few more years before the improvements start to filter through to an improved loss ratio. It seems to me that without any analysis of when the poor advice was given, it is impossible to say whether the current rules do solve the relevant market failures such that the status quo is perfectly acceptable (backed up with a continued commitment to improved training and professional development) or whether still further regulatory intervention is required.

Recognising it is not in the nature of a government or a regulator to be happy to let anything bed down for too long without rolling out some new initiative lest they be accused of idleness, it makes sense to at least consider whether the suggested solutions are likely to improve upon the status quo in a proportionate way, or at all (or indeed make the position worse).

Looking at Chapter 4, the FSA start quite reasonably with the premise that the owners of a firm have a material financial stake in it and they will act to protect that stake. They go on to suggest that the £10,000 own funds requirement is too small to be material such that the incentive to protect it is weak. The £10,000 own funds requirement was set in 1994 and would apparently be worth £12,500 today if it increased in line with inflation.

The paper appears quite critical of the PII market and ventures to suggest that there is some evidence that the PII market is not operating in a fully risk based way. It suggests that some insurers do not consider the risk of individual firms in setting premiums. I personally find this an extraordinary claim. The IFA sector is considered to be one of the most difficult classes of professional indemnity to write successfully and those underwriters who have managed to maintain a continuous presence in the market throughout its turbulent history since regulation take risk assessment very seriously indeed. The length of an average IFA proposal form is a testament to that.

The PI market is of course cyclical and has periods of softness as is the case presently. When capacity is washing round the market, new and less experienced underwriters do venture into this class and whilst the more experienced market may occasionally scratch their head at the recklessness/naivety of some of the new entrants, even they would not suggest that the underwriters are not attempting to carry out any risk assessment at all.

There is however limitations to what can be done by way of risk assessment for a proportionate cost. Not so very long ago when PI rates were double if not triple to what they are today, underwriters could insist on risk surveys with the cost being borne by the proposer or lost within a fat premium. For now those days are gone save for the very large insured’s or distressed risks. As the market reaches its bottom and cash sloshes around looking for something to do, even the poorest risks will find a home with the most desperate/naïve underwriters.

Whilst it appears the FSA is currently lamenting the PI markets willingness to support their poorest firms the market will turn, as it has always done, and at that point not only will the rates for all insured’s start to drive up, but those firms that are weakest will run the real risk of becoming uninsurable. The FSA does appear to have a very short memory. In 2002/2003 PI rates were very hard indeed and there was a very restricted number of insurers prepared to write the class. Capacity restrictions on those insurers willing to write the class still meant that many IFA’s could not find cover. A significant number of those IFA’s did need driving out of the industry and the current numbers from the FSCS appear to be a testament to that.

Unfortunately there were many good firms who found themselves unable to find cover. Some good firms had been insured with an insurer who was fleeing the market and found the established players who were in for the long haul, giving priority to their own renewal book. As we know because of the number of good firms in difficulties the FSA started signing waivers to get the firms through the hard market but in doing so, they did throw a life line to some firms who the industry would have been better off without.

The PI market does to some extent police the market by driving out poor risks and at the peak of the market it can be very brutal indeed. In the trough of the cycle as now, its effect is weak. In the ideal world there should be a happy medium. However to reach that one would need to tame the insurance cycle and to date no one has worked out how that can be done and I do not see the FSA solving that particular problem any time soon.

In any event ultimately the PI market is not there to be the police force of the IFA industry, the onus must be on the regulators to identify the genuine bad apples and remove them from the market. As insurers we have a small part to play, and IFA’s need to be concerned about their loss experience as the hard market will return. Equally we, as insurers, are looking to the regulators to identify and remove the worst offenders as it is extremely difficult to identify them from a few tick boxes on a proposal form and the average premium does not allow for the sort of in depth risk analysis that would be required to identify the truly rotten risk.

The FSA also looks at the issue of whether “claims made” rather than a “business written” base of insurance would motivate insurers to carry out a better assessment of risk. The answer to that is a theoretical yes it would. I say theoretical because I cannot see any Underwriter being prepared to write this class on a “business written” basis. I say yes it would, because if they could be persuaded, then the premiums would be so enormous that it may well be possible to build in some extra risk assessment. It is however in my view a complete non-starter. No other UK profession is written on that basis and with all due respect to IFA’s this class would be the last profession that anyone would want to trial run a shift away from “claims made”.

To write on a “business written” basis you really do not want to fear that 10 years later the regulator is going to suddenly decide that for the last 10 years the whole profession has been negligently mis-selling billions of pounds worth of policies which will belatedly need looking at. In other jurisdictions that do have “business written” insurance, there is normally a short discovery period of perhaps only 5 years, which brings its own set of problems.

Later in the paper the FSA has a dig at the PI market by suggesting that there are terms within a PI policy which tend to make it difficult in practice for firms to claim. The Pension Review did throw up some difficult issues for insurers. However with the issue of blanket notification largely behind us (at least for now) my experience is that IFA’s have very little difficulty in claiming under their policies. Short of notifying the matter promptly as soon as you become aware of it and not agreeing to spend your insurers money without their prior consent there really is not much more to it. Ultimately of course IFA’s are underwriters clients, underwriters care about their reputation within the market too, particularly those who have spent a long time building a lot of expertise in the market and have every intention of being there in the hard as well as the soft market.

The paper also touches on whether or not the excess level ought to be reduced. The FSA has gone down the route previously of trying to be overly prescriptive about what cover firms should have. If this is set too tightly, whilst it may work in the soft market it will unravel in a hard market. Any limits need to be set with the hard market in mind. In any event it is not normally in an insured’s interest to pound swop with his insurers by setting the excess too low.

Having perhaps perceived correctly that it is going to be very difficult to make PI insurers any more effective than they are already in driving out poorer firms, the FSA is looking at whether they could adopt a risk based capital resource requirement themselves to assist the process.

The FSA state that there is “no agreed wisdom on which parameters is the best or even a reliable predictor of mis-selling that would support a variable capital resource requirement”. To my mind that is the start and end of it. Though I have had the privilege of working with many of the best underwriters in the class it is ultimately an art and not a science. Whilst you can introduce formal systems to try and sort the wheat from the chaff there are no hard and fast rules and ultimately it comes down to the individual underwriters skill and judgement. If it were to be carried out by a regulator and the resultant bill imposed by dictate, (rather than just a competing quote in a free market) it would be impossible to justify.

The FSA suggests it could look at qualifications, areas of business, turnover, compliance systems, audit, length of tail, but how they inter-relate to risk is extremely complex and ever changing and would be a wholly unsuitable way in my opinion for a regulator to try and set capital adequacy. Not only would they utterly fail in getting it right to any reliable extent, the cost of attempting to do so would be completely disproportionate to the benefit of any marginal difference in capital adequacy, which in any event bears no relation whatsoever to the likelihood of mis-selling.

I am a great believer in training and qualifications as a way of minimising the risk of mis-selling. It seems to me that there are two key factors in play with qualifications and training. The first is simply the more you understand about the very complex area of financial advice, the less likely you are to make errors and/or gullibly believe the promotional patter of provider representatives. Second, is the pure investment of time and effort committed by the adviser. Whilst much is made in the discussion paper of the investment by the owner in the business, to my mind the absolute key thing is the investment made by the individual advisers giving the advice. If an adviser has had to work really hard to get properly qualified to call himself a professional then he is committed to the industry and has a very significant personal stake in his own reputation.

To my mind it is this issue that explains why the product providers with all their enormous resources and capital fail to match the claims experience of the independent financial advisers. It is much harder to be an IFA than it is to be a sales rep for a product provider. You cannot rely on your product providers enormous advertising budget to maintain your reputation. You know that your reputation in your area is down to you and you cannot be anonymous. The more a person invests in their career the less likely they are to be reckless with their reputation for short term gain. For that reason whilst I am not at all convinced that capital adequacy has any part to play as the value of a companies “reputation” will always be much more, if one was to differentiate between classes of business then giving an incentive for firms to invest in their staff through training and qualifications would at least make some sense to me.

Looking at the final section on the paper dealing with the burden of the FSCS, it has always amazed me the sheer number of sole traders and partnerships that are declared in default by the FSCS. In my experience the reality is not that the sole traders or partners are bankrupt, rather that they simply fail to return the FSCS’s form or co-operate with the FSCS’s enquiries. To minimise any inconvenience to the consumer the FSCS then declares the firm in default and pays claims.

Whilst theoretically the FSCS takes subrogation rights and can pursue the non-co-operating sole trader/partners, the practical difficulties associated with subrogated claims are such that the majority of recovery actions get written off.

If the industry was serious about wanting to reduce the FSCS levy, a good place in my opinion to start would be to refuse to consider a consumers claim against a sole trader or partnership until at least one consumer had obtained an unsatisfied judgement against the firm. If the sole trader or firm is really without assets then the consumer can obtain this with the minimum of fuss by way of a judgement in default. However in the majority of cases these claims would end up being defended and successfully at that. Those consumers that had good claims would more often than not be paid by the firm as the firms do have assets and often run off PI.

The FSCS pays many millions of pounds out to undeserving claimants because, being fair to them, it is very difficult to defend claims if the adviser does not provide his file or assist the defence. If the FSCS were a lot slower to declare sole traders and partnerships in default until they truly are satisfied they are not able to meet their liabilities then this would reduce significantly in my opinion the FSCS levy and would encourage more firms to buy run off cover.

With limited liability companies, it is much more likely that they will fall into default once they have ceased to trade. Once there is no income coming into the business, there is no good reason not to advertise for creditors and then carry out an orderly winding up, with the remaining assets returned to shareholders. Claims will invariably come in after the winding up and fall to the FSCS. It seems to me there is a very great difference between a sole trader/partnership and a limited liability company. Any professional trading as a sole trader or a partnership is going to be very concerned about mis-selling claims because they know that if the system is working correctly they take those liabilities to the grave. Clearly on that basis there is some rationale for a making a capital adequacy distinction between sole trader/partnerships and limited companies. Making a higher capital adequacy requirement for limited companies would however probably serve no purpose because on liquidation the capital would still be exhausted on fees. However there is an argument that a limited companies contribution to the FSCS’s levy ought to be higher than a sole trader or partnership, particularly if the FSCS raised their game on who they declare in default.

The suggestion that product providers take some responsibility for their products ought not to be a serious one if IFA’s have any claim to being a profession. Product providers ought to have the freedom to put toxic, dangerous, useless products out there and IFA’s ought to be confident that they will not sell them. We need product providers to be innovative and unfettered. If they give advice on their products then clearly they are responsible for that, but the advice industry, if it is to be a profession, must grow up and accept responsibility for spotting rubbish products.

Collegiate & Hiscox launch new underwriting agency

Hiscox Insurance Company Limited and Collegiate Management Services Limited today announced that Hiscox will now provide capacity for the general professional indemnity business of ‘Collegiate Underwriting’.

The new deal between Hiscox and Collegiate brings together two organisations with a common target market and allows Hiscox to continue its strategic drive to become the UK’s premier insurer for SME professionals in Europe. Collegiate is already well established in the Independent Financial Advisers market and this new partnership will assist Collegiate in expanding its traditional and emerging SME professions business.

Hiscox will utilise Collegiate’s claims handling arm allowing brokers and customers to benefit from an in-house specialist legal team ensuring that claims are defended by a dedicated resource that understand the needs of these clients.

Mark Gibbon, Financial Director, Collegiate, said: “This new facility enables us to combine Hiscox’s core product strength with Collegiate’s high service standards.”

Zahid Naqvi, Professional Indemnity Underwriting Manager, Hiscox, said: “Collegiate’s experience in providing professional indemnity insurance to UK-based professions opens up another excellent distribution channel in our target market.”

Frozen Assets

Mark Bates an in-house solicitor at PI insurer Collegiate has come third in the 2007 Polar challenge.

The challenge involved skiing 350 miles across the Artic to the magnetic North Pole in temperatures of up to minus 50 degrees. As well as his pre-race training in Wales, Norway and the Arctic, Mark also had the benefit of Ex-World Champion Nigel Benn giving him a sparring session in the ring at his local gym.

Mark along with his two team mates completed the gruelling trip in a very respectable 16 days eight hours and 55 minutes in conditions that were even harsher than expected. The most challenging section of the trip was moving through the ice rubble which mark described as “mental torture”.

This trip of a lifetime enabled Mark to raise over £5,000 for his chosen charity cancer research.

Regulator is right not to increase ombudsman limit

Money Marketing-21-Jun-2007

Martin Archer, Claims Director, Collegiate Claims

Having been closely involved with two of the cases referred to in Adam Samuels' article headlined, Power Failure at FOS, (Money Marketing, June 14), I do take issue with the main thrust of the article, namely that the FSA looks foolish in declining to raise the ombudsman's jurisdiction limit.

In my opinion, the FSA looks nothing of the sort. The Financial Ombudsman Service is wholly unsuitable for resolving big loss cases.

We can all recognise that the FOS has a role in resolving disputes but its procedures are based on the desire to minimise costs and promote access to justice.

However, while one can live with the "rough and ready" results that this will understandably deliver for small-value claims, the limitations of the service need to be recognised.

In particular, the reluctance to hold oral hearings and the inability to summons witnesses make it a completely unsatisfactory jurisdiction to resolve high-value claims.

It would be grossly unfair to compel an IFA and their insurers to pay more than £100,000 where the client's version of events is disputed without the client being subject to oral cross-examination.

It is simply not the case that FSA consumer protection is inadequate for those with big losses. Consumers have access to arguably the best legal system in the world which has been developed over many centuries to deliver true justice in a case.

The advent of no-win no-fee solicitors backed with legal cost insurance make it perfectly possible for consumers with valid complaints to pursue them through the courts.

It is not treating your customers unfairly to raise legitimate defences to claims and the FOS is not the final arbiter of that on claims over £100,000.

The FSA recognised the limitations of the FOS procedures that are inherent in any cheap and cheerful delivery system and were absolutely correct in resisting the pressure to increase the limit.

An increase to the limit would undoubtedly have advantages to consumers but the burden of unjust decisions falls too heavily on individual IFAs.

Court says FOS must keep to �100k limit

Money Marketing-31-May-2007

The High Court has ruled that the Financial Ombudsman Service does not have the power to make binding "directional" awards requiring redress payment of over £100,000.

The FOS has the power to make two types of binding awards, a monetary award capped at £100,000 and a directional award, in which a firm takes such steps as the FOS considers "just and appropriate", which is not subject to a financial limit.

However, the ruling was brought on two separate cases where a complainant had obtained an FOS award in his favour, which appeared to require a redress payment of over £100,000 and, in one, well over £1m.

The complainants - Roger Bunney and Jeremiah James Cahill - brought the case to the High Court after Burns-Anderson and Timothy James and Partners refused to pay more than £100,000.

The two firms, represented by law firm CMS Cameron McKenna, argued that if an award requires the payment of money to, or for the benefit of, the complainant, it is a monetary award and therefore subject to the £100,000 limit.

The court held that it is not necessary for an award to be quantified in monetary terms in order to be classed as a monetary award and so the £100,000 payment cap is applicable to any directional award that requires payment.

CMS say this ruling prevents the FOS circumventing the £100,000 cap by using formulae to calculate redress rather than stating specific figures.

Financial Ombudsman Service spokesman David Cresswell says: "We have always pointed out that it is for the courts to decide how much money can be awarded in the event that a consumer pursued an ombudsman award through the legal system and up to the courts to enforce. This is welcome clarification."

Collegiate legal director Martin Archer says: "Insurers derive real comfort from the £100k FOS limit when assessing premiums and this judgement is an important victory”.

Watchdog row with PI firms

Money Marketing -15-Mar-2007

The Financial Ombudsman Service has accused PI insurers of blocking IFAs improving complaint-handling standards by using delaying tactics and overly legalistic procedures.

Speaking last week on Money Marketing TV, FOS principal ombudsman Tony Boorman said: "PI insurers can get in the way of good complaint handling by delaying matters and adopting a rather unnecessarily legalistic approach.".

Boorman refuted claims of a lack of consistency in the FOS's decision-making processes.

He said it was an easy allegation to make due to the different cases it deals with but admitted it could do more to raise adviser confidence by publishing more details on the reasoning behind decisions.

PI firms have hit back, with Collegiate managing director Tony Howe saying Boorman's comments are hypocritical and claiming the FOS is responsible for most delays. Howe says insurers have legal liability so must take a strong legalistic approach.

He says: "This is a huge case of the pot calling the kettle black. Most of the delays we see are caused by the FOS rather than PI insurers, due to its heavy workload. We have to work to time limits while the FOS does not and it seems to take forever with certain cases."

Collegiate direct PI for small firms

Money Marketing-24-Aug-2006

Collegiate is offering professional indemnity cover for smaller IFA firms which deals directly with the firm.

Collegiate Direct will launch in September and is targeted at - but not limited to - adviser firms with a turnover of less than £200,000 which are not serviced by insurance brokers because of their size.

Head of underwriting Richard Turnbull says smaller firms represent a lower overall risk profile so the application process will be simplified.

He says applicants complete a short proposal via email or through the firm's website.

FSA leaving compensation limits unchanged

Money Marketing-08-Jun-2006

Advisers and professional indemnity insurers have hailed the FSA's decision not to raise existing payout limits for the FSCS and the FOS.

Compensation and eligibility limits for the Financial Services Compensation Scheme and Financial Ombudsman Scheme will remain unchanged until at least 2009 when the next review takes place. The FOS limit is currently £100,000 for all types of business while the FSCS limits depend on product type.

The FSA began its consultation before Christmas after its own review suggested that most claims were well below current payout limits and found no evidence that the limits were affecting consumer confidence.

The regulator also pointed out that the FSCS limits exceed EU minimum limits significantly and are generally higher than in other member state countries.

Aifa has welcomed the decision, claiming there was no justification for a rise in the limits, but the Financial Services Consumer Panel claims the move is bad news for consumers and says the FOS compensation limit, which was set in 1981, should have increased in line with inflation.

Collegiate managing director Tony Howe says consumers still have the protection of the courts for big payouts where cases of such magnitude can be given the scrutiny they deserve.

Howe says: "This is good news for advisers as there was real concern about the effect of any rise in limits on PI costs and the potential for advisers to be unprotected for claims over £100,000. The FOS justice might be all right for cheap and cheerful rulings but not for very big cases that should be decided in court."

Aifa director of public affairs Tracy Mullins says: "There was no justification in raising the levels of the limits and we submitted evidence to the FSA arguing this case, which the regulator seems to have agreed with."

Importance of being earnest on loan criteria

Money marketing-08-Mar-2007

Martin Archer, Claims Director, Collegiate

I trust that your mortgage broking readers were not unduly flattered by the comments of Accord Mortgages managing director Linda Will that brokers are better suited to helping their clients than lenders when they are faced with repossession (Money Marketing, February 22).

One can well understand why lenders are keen to put the broker back into the equation to assist in a remortgage or debt consolidation away from them, thus saving them from the consequence of their optimistic lending decision.

Failing that, as she points out, "there is also the issue that the broker assessed the initial affordability, so it could be a TCF point for the broker to then help their customer who is in trouble". In other words, the broker can carry the can for the boldness of the provider's lending policy.

I do not suggest that this is a particularly unreasonable stance for lenders to take, given the regulatory and ombudsman regime that mortgage brokers are now subject to. However, it highlights the reality that should repossessions go through the roof, those brokers who have not positively advised against irresponsible borrowing, as opposed to merely warning clients about the risk, run the risk of finding their professional indemnity premiums also going through the roof, as PI insurers start to appreciate the regulatory reality of where culpability will be perceived to lie.

IFAs have often carried the can for the mistakes of providers in their product design and mortgage brokers should be under no illusion that they too will carry the can for mortgage lenders' reckless lending criteria.

Given there is no consensus as to what is and what is not an affordable mortgage commitment, one should not be very surprised if, with the easy wisdom of hindsight, the Financial Ombudsman Service concludes that the bar ought to have been set very much lower than some of the current aggressive lending criteria offered in the market.

Also, one should not be surprised in this consumerist age if the FOS pays short shrift to any broker who hopes to rely on a few standard paragraphs highlighting the risks but who fails to actually advise their clients against running them.

Warning that 18-month PI risks EU breach

Money Marketing -03-Nov-2005

IFAs taking out 18-month PI policies risk breaching EU rules on minimum insurance requirements, warns Collegiate managing director Tony Howe.

Howe says an increasing number of brokers are offering 18-month policies to stop their competitors picking up clients on their renewal date. But he says these policies are rendered useless by the annual £1.1m limit of indemnity required by EU directives.

He says if at the end of one year there has been an erosion of cover below the LOI, the IFA would have to top up the cover. While cover can be eroded during the 12 months from the start of the policy, the full £1.1m cover is required on the anniversary of the policy taking effect. This means that an IFA can blow the £1.1m requirement on day one of the policy without breaching EU rules but will need to buy more cover to meet the LOI as the policy enters the last six months of an 18-month term.

Howe says IFAs will find it difficult to find an underwriter to reinstate the cover at a reasonable price and may be left unprotected. He says: "These policies can be effectively useless once the one year is up. The message for IFAs is beware idiots bearing gifts."

The FSA says it works on the basis of 12-month policies but declined to comment further.

Collegiate to favour Institutes members

Financial Adviser 15 Sept 2005

THE Institute of Financial Planning has negotiated a professional indemnity scheme for its members which takes into account the number of certified financial planners a company has.

The scheme has been launched by the Collegiate Group, which acts as a PI provider, underwriter and claims handler.

Tony Howe, chairman of Collegiate Insurance Brokers, said the scheme would calculate PI premiums for companies employing IFP members by looking at the losses through claims for the total number of companies insured under the scheme. The more CFP-qualified advisers a company has, the lower its premiums would be, taking into account its claims history.

Mr Howe said: “Even though the IFP members are IFAs, we are looking at them as a separate class for underwriting purposes. We are saying they are quality people, with far fewer claims, or the claims are of less magnitude or are less likely to succeed.”

He said there were no figures detailing IFP members’ claims experience compared with non-members by which to quantify the discounts, but the scheme was a “long-term promise that companies’ ratings will reflect the claims experience”.

Mark Andrews, managing director of Purplecircle Consulting and an IFP member, said: “Anything that helps drive down PI premiums and recognises that a company has taken the time and trouble to achieve higher standards has to be for the good. I am already covered through the broker NCG, but, if I thought for any reason it was not competitive, I could go elsewhere.”

FSA to consult on raising �100k compensation cap

Money Marketing -14-Jul-2005

The FSA is to consult on controversial proposals to increase the amount of compensation that the Financial Ombudsman Service can award complainants.

The proposals to raise the £100,000 cap, made by independent assessor Michael Barnes in the ombudsman'...

The FSA is to consult on controversial proposals to increase the amount of compensation that the Financial Ombudsman Service can award complainants.

The proposals to raise the £100,000 cap, made by independent assessor Michael Barnes in the ombudsman's annual report last month, have prompted fears of rising PI costs and increased IFA vulnerability.

The FOS can currently recommend that additional compensation be paid although firms do not have to accept the recommendation.

Barnes stated in the report that complainants who are not prepared to settle for £100,000 and are unwilling to gamble son whether the IFA will accept the FOS's recommendation for extra compensation could be forced to pursue costly legal action against the firm. He argued that the cap had been in place since 1981 and should be raised substantially.

But Collegiate managing director Tony Howe says PI insurers could refuse to provide cover above £100,000.

He says: "The FOS needs the support of the PI market. There is no point demanding more compensation from an IFA that cannot get insurance. This will only push IFAs out of the market and shift the costs on to the Financial Services Compensation Scheme."

Positive Solutions IFA John Donaldson says: "This will add to the general concern among advisers about the spurious claims that are leading to the bankruptcy of IFAs."

FOS spokesman David Cresswell says: "It would be misleading to focus on this issue because only 0.3 per cent of awards exceed £100,000. I am not surprised PI insurers are resistant to these proposals as it is their intention and purpose not to pay claims and tell cli- ents how to reject complaints."

Advisers are trading without PI

Money Marketing-28-Apr-2005

The FSA is failing to crack down on firms operating without professional indemnity insurance, leading to concerns that IFAs could slip through the net, says Collegiate managing director Tony Howe.

In 2003, the FSA adop-ted a sympathetic approach to IFAs struggling to obtain PI cover by granting waivers to firms. This ended in January this year with the onset of the Insurance Mediation Directive, requiring intermediaries to have £1m in PI cover but Howe estimates that up to 40 IFAs could be trading without PI cover, leaving consumers unprotected and other IFAs to foot the bill through the Financial Services Compensation Scheme if a firm fails.

Howe says despite the availability of PI cover in today's more benign market, some IFAs are not showing any urgency to get cover. He says: "Some IFAs are putting together presentations which do not put them in the most favourable light.

"It is now a matter of enforcement. I have seen little evidence that the FSA is acting quickly enough on this. At the very least, I would expect clients of IFAs without PI cover to be informed."

But FSA spokesman Robin Gordon Walker says the regulator is not responsible for ensuring IFAs take out PI cover.

He says: "The onus is on IFAs to do the acquiring. If they are required to have PI insurance and do not have it then they are non-compliant."

Take note of a costly subject

Financial Adviser 28 April 2005

Tony Howe, chief executive of Collegiate Insurance Brokers

The subject of professional indemnity insurance and networks is not without interest – particularly to those who have to pay the cost of PI insurance.

However, it is somewhat technical in nature. This is unavoidable and I can only apologise for it.

Under the current legal framework, businesses who wish to carry on business giving investment advice but not to be directly authorised can do so only if they obtain an exemption. They can achieve that automatically by becoming an AR – an appointed representative of an approved person.

Section 39 of the Financial Services and Markets Act provides that an AR is exempt from the general prohibition by virtue of his contract with an authorised person who has accepted responsibility in writing for his activities.

This without more would not be binding on any third-party client now turned claimant, but subsection 3 makes the authorised person responsible as a principal for everything done or not done by the AR in carrying on the business for which responsibility is accepted.

This does not mean that the AR has no duties to his clients. Just because his principal may have accepted responsibility and, by virtue of the statute be exposed to third-party claims, nonetheless, the AR retains residual responsibility to his client both in contract and in tort – civil wrongs recognised by law as grounds for a lawsuit.

Furthermore, even if the network has accepted responsibility for the activities of the AR, it will probably seek full indemnity under the network’s membership agreement for everything the AR has done.

The network itself, however, has potential liabilities. It may be the subject of a complaint or be sued by the AR’s client. Though the liability can be passed onto the AR, it may not always happen.

The AR may say that the complaint would not have occurred but for some culpability on the part of the network in respect of the services it provided. More often the indemnity may not help simply because the AR is unable to meet the liability.

As the authorised person, the network is obliged to meet the financial resource requirements in Chapter 13 of the Interim Prudential Sourcebook: Investment Business.

In addition to having adequate capital resources, the network is obliged, no matter how great those resources may be, to take out PI insurance. The amount it has to purchase will depend upon the total commission income of the network. The policy it buys must comply with the general principles laid down, and any failure to meet these has to be reported to the FSA within 28 days of renewal.

On top of the basic financial resource requirement, like any other authorised entity the network is obliged to provide additional own funds if it bears levels of excess more than £5000 per claim, or if it agrees to exclude from cover claims arising from lines of business which have been or may be undertaken by the network businesses.

Networks therefore have choices in arranging their insurance. They might simply cover their own liability and require their ARs to buy cover in the general marketplace.

Their second choice is to arrange separate cover for the network and a master policy for the network members who would be required to participate in those arrangements, or as an alternative to arrange one composite policy with different aggregate limits and sub limits, the network members being co-insured.

The main advantage of these latter methods is that the network has complete control over buying the cover and is able to satisfy itself that the ARs will be able to meet claims against them or arising under the indemnity.

PI insurance has also been seen as a recruiting sergeant for the networks. If cover can be got at reasonable prices with low excesses, then the network is able to offer an attractive package to an AR who would clearly be concerned as to his exposure to his client base, as well as the potential liabilities he incurs under the indemnity to the network.

Whereas until a year ago, cover had to be purchased from a UK authorised insurer, the rules have been relaxed. Some or all of the regulatory required cover can be bought through its own captive insurance.

An alternative may also be available in the form of a comparable guarantee.

If a network opts for captive insurances, it must satisfy the FSA as to the financial standing of the captive and confirm that the captive is not breaching the general prohibition against transacting business within the UK.

The use of captives may offer networks a welcome respite from the vagaries of commercial cover, when inadequate capacity led to high premium rates and restricted cover with a high degree of pound swapping necessary to satisfy the low excess requirements of the member companies.

These pound-swapping premiums would be grossed up not only for commissions, but for an element of profit to justify the insurer offering its limited capacity.

It can be anticipated that there will be an underlying frequency of claims happening every year. A small number of larger claims may arise, say every three years, and lastly the occasional catastrophe will arise once every blue moon.

The use of a captive programme coupled, say, with three-year alternative-risk transfer reinsurance would be leaving the unexpected catastrophe to the insurance market. This can be highly efficient.

Arranging insurance on behalf of the network members also carries with it the complication of allocating costs among the network members.

This may involve an element of individual underwriting. Here some guidance should be found from the network’s broker or scheme underwriter.

When members leave the network, it would be well advised to have a provision in the network agreement enabling it either to require the former member to continue to maintain PI cover, or preferably, entitling the network to buy such cover for the former member at his expense.

Obtaining a deposit of, say, 300 per cent of the individual member’s final year’s premium would be sensible to enable the network to purchase at least six years’ run off for the departing member concerned.

That may seem a lot, but it would represent a deduction of 20 per cent a year recognising a reducing exposure to claims against the former member over a six-year period. The liabilities arising from that member’s activities could far exceed that period.

However, since January it has become relevant to ask whether a network in arranging insurance for its members is acting in breach of the prohibition against acting as an insurance intermediary without authorisation.

In the FSA’s view, a person brings about a contract of insurance if his involvement in the chain of events leading to the contract of insurance were important enough that without it there would be no policy. Most networks compulsorily would seem to fall into that provision.

However, there is an important potential exclusion for persons whose principal business is other than insurance mediation activities where the provision of information may reasonably be regarded as being incidental to that professional business.

Thus, within the exception are things, such as as dental insurance being incidental to a dentist’s activities. If a network wants to establish whether this exemption is of any help, it would be well advised to ask the FSA to confirm it has no objection to the proposition that the company is not engaging in a regulated activity without permission.

If the FSA considers otherwise, then the route open to the network is either to extend the scope of its permission or to seek formally an exemption from the requirement.

Last year’s relaxation of the financial resource rules was a mixed blessing.

Some networks would have been exempt by virtue of their share capital from the requirement to buy cover at all.

While not to have done so may have been imprudent and unpopular with members, the network was free to make whatever arrangements it wished – including in particular avoiding the prescriptive policy wording which had caused so much difficulty with PI insurers.

Now all networks have been dragged into the net. However, they benefit from the reduction in required limits of indemnity and greater flexibility over the terms of cover, permitted exclusions and excesses, not to mention the possible use of captives.

Lastly, the regulation of general insurance with effect from January this year has given networks something else to think about.

The insurance of networks involves intellectual challenge and offers interesting opportunities to be explored by the networks and the unhappy brokers who advise them.

Tony Howe is chief executive of Collegiate Insurance Brokers