Professional indemnity insurance is often not working properly in the financial advice sector, FCA chief executive Andrew Bailey has acknowledged.
Speaking at the Association of British Insurers’ annual conference today, Bailey said that while advice firm failures were smaller than those of banks, PI insurers were frequently writing contracts that excluded the losses, leaving the FSCS and capital adequacy to pick up the bill.
Bailey said: “While losses as principal dominated the financial crisis – in other words, the failure of banks – and the interest costs of these failures remain even now the biggest costs being covered by the FSCS, failure of firms acting as agent are more common, if on average smaller.
“For agency firms, capital is not where we should start – as holding capital is an inefficient way of mitigating the risks posed by firms who are not typically a threat to the system. The front stop should be commercial insurance in the form of PI cover, much as it is for lawyers and other professions.
“But PI cover is not by experience always reliably performing the role, particularly in the IFA and investments world, – the contracts are framed often in ways that rule out loss absorption in the context we are dealing with here when the firm fails. What is the consequence of this? It is that the protection of client assets and ultimately the FSCS become the primary lines of defence, and this is what has happened.”
Bailey called on the insurance industry to input ideas on how to make the PI market and the FSCS work more effectively.
He said: “This is rightly a public policy issue, but it is also a private issue too because many advisory firms are meeting substantial bills for FSCS pay-outs. With all this in mind, my request today to the insurance industry is to help us to think through how we might solve this problem.”