Paul Smee is director-general of AIFA
As you can imagine, PII is a subject that has taken up a disturbing amount of my time in the IFA market over the past couple of years.
Negotiations in Brussels; negotiations with the FSA over the financial trade-offs, what if PII cover was not available; negotiations with the PII market about its attitude toward IFA business. To paraphrase Mary Tudor: “When I die [and it is not my intention for this to happen just yet but others may have different ideas], they will find professional indemnity insurance engraved upon my heart.”
But first the good news. In my wanderings through the PII market I have not yet encountered anyone who warns of impending doom or the drying-up of cover for the mortgage intermediary market. You should be able to get cover but I can offer no guarantees about whether the price will be the same as last year.
And there is no reason either to feel at a loss when faced with the new FSA requirements. AMI members can turn to a factsheet that contrasts FSA requirements for PII with those of the MCCB. And non-AMI members can fill in an application form.
And now the warning. PII capacity in general is tight across markets and across the world. Underwriters do not have the time or the inclination to burrow through complex PII applications. They will favour those that present information simply and accurately. They might also take a different view of your business when it is regulated as there is a concern about regulated activities in general.
Your PII broker should help – after all he is being paid for his services – but some brokers are more helpful than others. All should be giving you the best chance of securing cover and helping you ensure the accuracy and quality of your application. If they are not, make them sweat.
PII also kicks in if you are carrying on any general insurance business such as ASU, term or PHI. It is a requirement of the EU Insurance Mediation Directive that every general insurance intermediary carries a specified level of PII cover – far higher than the smaller business would normally think it necessary to acquire. We argued at length against this provision, or rather the detail with which it was drafted, but we didn't get enough support from other intermediary bodies in Europe to carry the day (although some now wish that they had followed our line). AIFA is working alongside the FSA to ensure that the European requirements do not cause businesses additional problems.
Our main task is to help the regulator and the PII market understand the position of the mortgage intermediary and not become distracted by media speculation or inaccurate comment. We will keep beating our well-worn path to the FSA's door and to the PII market itself.
Nick Kelly is managing director, regulated networks, of Tenet Group Running IFA networks has necessitated a detailed knowledge of CP193, the Insurance Mediation Directive, and professional indemnity insurance – a cost which continues to rise and drive good advisers out.
For the mortgage adviser entering the world of the FSA, as the cost of this trading prerequisite begins to escalate, the challenge is to establish how underwriters will assess risks and how they will discount this charge as quality compliance is demonstrated.
Compliance is a double-edged sword. While it can expose weakness, good compliance can (most of the time) be relied on to ensure that complaints can be defended as the original advice can be backed up by research and documentation.
While a relationship of trust and integrity is established with a client at point-of-sale, it is almost always post-sale that the investment arena has seen problems due to personal circumstances or market changes. This leaves the integrity of the sales process and the documentation to prove the client was aware of risks and that advice was appropriate.
Few would disagree that consumer groups should bring inappropriate practices to light. But as for where to lay the blame for products/markets not performing as expected the onus is almost always on the adviser to disprove negligence or mis-selling – and if that fails he looks to the PII underwriter to settle. We know mortgage PII underwriters are consulting with their investment underwriter/actuarial counterparts to pin down the potential risks under the FSA. Premiums are already beginning to rise.
During 2002 the MCCB confirmed that only a few hundred cases were critical of advice. A few alleged nondisclosure of redemption penalties which perhaps explains why mortgage PII costs have until now been relatively low.
Conversely, in its Plans and Budgets 2004 to 2005 report, the Financial Ombudsman Service estimates that the number of complaints expected to be handled post-N4 will increase dramatically.
In our IFA networks we find that a small percentage of customer complaints routinely progress to the FOS, which expects to adjudicate over 9,000 mortgage complaints plus 3,500 mortgage loans complaints and 3,000 associated general insurance complaints in 2005.
Taking into account this forecast, the role networks play and the MCCB's experience, it is not unreasonable to expect complaints for 2005 to exceed 150,000 – a risk that underwriters will be keen to pass back in charges and cover limits. Compliance safeguards offered by networks enable them to provide competitive PII cover – another reason why the network route for mortgage advisers can produce savings while ensuring that embedded risk is reduced to a minimum.