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Structured products: Advisers seek solution to soaring PI costs

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Structured products: Advisers seek solution to soaring PI costs

As advisers using structured products face rising PI insurance premiums or the exclusion of the asset class from cover, some are frustrated with insurers while others, like David Crozier (pictured) want the FSA to act.

Rising professional indemnity (PI) insurance premiums for advisers recommending structured products have been adding strain to IFA businesses already facing the challenges of preparing for the retail distribution review (RDR), and could push some towards restricted status post-RDR.

Julian Davies, founder of Bridgend-based Davies Financial, faced an increase of £11,300 to his firm’s annual PI insurance premium, and Harry Moore, director of Bedford-based Harry Moore Independent Financial Advisors, also faced rising premiums.

Davies decided to shop around and went to SimplyBiz, which was offering a premium of £5,600, but the cover excluded structured products.

‘[I was told they classed structured products] as high-risk business and were not willing to cover any liabilities,’ he said. ‘The only structured products we have used are mainstream ones with companies such as Legal & General, Morgan Stanley, Cater Allen, Investec and Royal Bank of Scotland, none of which have ever failed. In fact, one recently matured, with a substantial gain being paid out to the client.’

Threat to IFA businesses

Davies said by excluding areas of the market and hiking up premiums, PI insurers were putting firms like his in a precarious position. It was high time they stopped dictating the terms of business, he said.

‘We can’t simply unwrite any business already written and I feel it is grossly unfair of a PI company to decide it won’t provide cover for a particular type of business,’ he said. ‘Perhaps an alternative would be for PI insurance to be eradicated altogether [and replaced by an] alternative, government-run scheme, to which all practices pay a fixed amount based on percentage of turnover.’

Moore, who sometimes uses structured products, said that he had noticed his premiums rising. He said that his insurer would price match if he shopped around for a better deal.

‘I’m fairly certain a lot of the new measures [and rising premiums] are driven by fear; fear of repercussions,’ he said. ‘Intermediaries’ costs are going up with PI cover. Perhaps product providers have created the environment for the sale to have gone wrong. It’s not necessarily the advisers’ fault but sometimes we are picking up the tab.’

Blame it on the risk curve

Ian Smith (pictured), director of Solihull-based Central Financial Planning, said higher premiums for advisers recommending structured products were ‘undoubtedly’ justified because the products were at the higher end of the risk curve.

‘If you are keen on structured products, you might find you are paying more in future,’ he said. ‘A lot of advisers don’t understand structured products and still recommend them, which is a recipe for disaster.’

David Crozier, director of Navigator Financial Planning in County Down, suggested a universal minimum level of PI cover should be guaranteed for all advisers.

‘I would prefer for all advisers to have universal cover than for structured products to be excluded from the terms, otherwise I end up paying through the Financial Services Compensation Scheme for other people’s misdemeanours,’ he said.

Providers’ reaction

Jamie Smith (pictured), senior director at Lloyds Banking Group and chairman of the provider-led Structured Product Association (SPA), said providers were keen to resolve the issue of rising premiums based on adviser feedback.

‘If insurers are taking a product-biased view, I am very keen to know on what basis they do that,’ he said. ‘It completely contradicts the principle of the RDR, as advisers have an obligation to consider the whole of market. It raises the prospect that if some of these areas of the market are deemed to be more risky, it puts pressure on some advisers to consider whether they should remain independent. Restricted could be the only commercially viable way forward.’

In contrast, Adrian Neave (pictured), managing director of structured product provider Gilliat Financial Solutions, said advisers’ lack of co-operation could be a stumbling block. ‘We will talk to PI providers, but no other advisers tell us who their PI provider is,’ he said. ‘You can’t force someone to talk to you.’

He said the regulator might not be the best route. ‘Who can you lobby?’ he said. ‘The Financial Services Authority doesn’t set PI cover.’

Crozier, however, insisted the FSA did have a role to play. ‘The FSA could put its foot down, [and say to insurers:] "If you’re going to offer PI cover to advisers there should be minimum level of cover and you can’t walk away from it". That has to be universal, otherwise it would push up the cost of cover,’ he said.

IFP plans to lobby

Nick Cann (pictured), chief executive of the Institute of Financial Planning, intends to help educate the FSA to identify new model firms and hopefully influence PI cover regulation. He said being new model did not come down to what investment vehicles firms chose.

‘Anything that [moves] further away from core solutions starts to impact on PI cover,’ he said. ‘[But] some of our members use structured products, and some will use unregulated collective investment schemes, so we are trying to get insurers’ focus away from products and more on the processes and robustness of the business. It’s not just about dealing with the product, [it’s about trying to get a] better understanding of the different kinds of business models.’

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