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RSA doubles IFA’s PI premiums after rate-rocketing risk review

by William Robins on Dec 13, 2012 at 08:45

RSA doubles IFA’s PI premiums after rate-rocketing risk review

Royal Sun Alliance (RSA) has hiked IFAs’ professional indemnity (PI) insurance rates, in some cases by 100%, following a review of the advice market.

The insurer is also demanding comprehensive information from advisers over their sales of structured products, unregulated collective investment schemes and ‘tax mitigation’ vehicles.

Chris Mellor (pictured), director of Amersham-based The Financial Management Group, was told the next 12 months of cover, beginning from 14 February, would cost his firm 100% more than it had the year before.

Mellor said the firm had arranged a small number of structured products, with unregulated investments accounting for less than 1% of its business last year.

He said the firm had received no complaints in relation to structured products or unregulated investments.

Mellor said RSA had no good reason to hike PI rates and accused it of taking advantage of a lack of competition in the IFA PI market.

‘It’s going up by 100% before the risk of anything else we are doing has been measured,’ he said.

A letter to Mellor from Julie Hustwit, a senior broker at Bartlett & Company, said: ‘RSA has undertaken a UK-wide rate review which has resulted in much higher rates… and there are no exceptions.’

28 comments so far. Why not have your say?

Arthur Schopenhauer

Dec 13, 2012 at 09:00

Follow the money the large institutions are the beneficiaries of changes not the clients and certainly not the advisers

When will this failed legislation be addressed

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Jonathan Kirby

Dec 13, 2012 at 09:13

Didn't somebody predict last week a fall in PI costs due to RDR?

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Arthur Schopenhauer

Dec 13, 2012 at 09:19

@Jonathan Kirby

Now who makes predictions you get rich by shorting??

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Dec 13, 2012 at 09:21

Further evidence of lack of representation.

For many years, AIFA were asleep (or arranging backscratching dinners) when they were needed. I fear it is too late now.

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Stevie P

Dec 13, 2012 at 09:34

So "if" the structured product providers want to do more business that benefits a client then why dont they get rubber stamp from the FSA (or son of) & then the PI insurers to convince them of the risk ?

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Julian Stevens

Dec 13, 2012 at 09:54

"a review of the advice market"? Shouldn't that read "a review of regulatory policy", notably with regard to regulation by hindsight and the FSA's practice of instructing the FSCS to short-circuit the normal complaints process?

Then again, only a month or two back, Martin Wheatley announced that the FCA will not be perpetuating the FSA's policy of hindsight reviews to shift onto intermediaries the blame for its own failings. And Linda Woodhall said that "after the end of this year all advice will be up to scratch." One may assume that RSA don't believe either of them.

To Jonathan Kirby ~ I believe it was Skandia that predicted a fall in PII rates post the FSA's Red Button Day.

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The ssinnic

Dec 13, 2012 at 10:02

Hindsight insurance is now no longer affordable nor will it be offerable. What does PI mean anyone?

Do you remember these words from a certain Mr Merrick..." we make the law"..... so how can you issue an insurance policy when the law's consequences you are supposed to be insuring against is unclear and not known..

I'm afraid the FSA and FOS have made PI a history lesson in the making!!

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David Cathcart

Dec 13, 2012 at 10:06

So it has started already, because IFA cannot exclude sections of advice from their PI, the insurers have them by the short and curlies.

This is one of the concerns that I put to the MD of the IFA Centre, who said it was absolute rubbish and was a poor excuse for choosing the restricted route !!!

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Dec 13, 2012 at 10:11

PI for advice is the unknown in the new world. Unfortunately the PI insurers still see financial planning as selling products. They have no idea how to rate with all the noise coming from the FSA on a daily basis.

This clarifies the need to separate out the areas.

1) product sales,

2) product intermediation &

3) financial planning advice.

Post RDR IFAS should be allowed to act in areas 2 & 3 with a professional bodies global PI plan included in individual RI level membership.

Correct me if i am wrong if the IFA is supposed to be an agent for the client. If so any option for additional protection should be the client choice and cost.

Clarity of service should be as simple as Independent acting for client, vs. Restricted acting for provider before client.

This takes me to (1) product sales area . Almost all complaints and failures relate to product. Thus a product levy is the required answer and regulated products having their own client protection policy in place for failure, fraud etc. Badge these as “New regulated solutions” and give them a kite-mark or something similar. Let the FSA do a real value advertising, promotion campaign.

Simple the higher the risk of a product the higher the cost to the provider.

The professional bodies give a simple fact sheet for advisers to utilise on all products that are then regulated and suitable for a retail investor. Product providers stay on the hook for any misrepresentation of a product that does not fit standard definitions ( IFAS can then tell clients what it says on the TIN.)

Suitability of a product is then a much more straightforward checking procedure for any professional adviser.

Clients / advisers/ Sales agents etc who act outside of “New regulated solutions” should need to get a declaration signed by client and a counter signature by the regulator for any transactions outside of this that throws all redress back on the individual consumer with appropriate warnings. Thus the regulator would be able to act under product intervention earlier when it sees a pattern of promotion.

Thus you end up with the same cost of a regulated product if bought with or without advice. The advice and any intermediation costs are separate and give the client the choice of do it themselves or seek help.

This is the only way to separate out cost and stop financial advice being artificially denied to the public.

Also the issue with PI insurance, FSCS levy, FOS etc all sorted in one go. Sorry just woke up much to simple an idea.

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The ssinnic

Dec 13, 2012 at 10:24

In two ancient words that have stood the test of time " caveat emptor". What was wrong with that?

Oh...of course..it wasn't good enough for the lawyers who draft these rules for the FSA because there isn't enough dosh to be made from it!

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Kim Taylor

Dec 13, 2012 at 10:52

The whole world is going to end on the 21st - so why do we worry!

I for one won't be able to keep on meeting this overbearing costs. I don't believe I earn a fraction of the regulators. I have anly been set up as a self employed IFA for 3 years and the costs have doubled in this time - wish my income had!!

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Compliance Doctor

Dec 13, 2012 at 10:57

Unfortunately this is not likely to be a random incident, more providers are going to review their rates.

Some firms do not have any evidence to challenge the Insurers as they do not have any active risk management operating in their businesses to cover all the elements of their business. There can be easily adopted methods for IFA Risk Management systems - just Google it. Often the best IFA risk management system doesn't need expensive additional software and can provide a full audit trail and evidence of how risks have been assessed, mitigated, transferred or accepted and above all proof that the firm has taken it seriously.

The problem a lot of insurers face is that although advisers no longer work on commission, they will be charging a fee, often based on a flawed hourly rate. Once the uncontrolled costs rise due to unforseen risks, the advisers hike up their hourly rates or start taking shortcuts on time spent on their clients cases and suddenly the complaints start rolling in, or worse (for the insurers and advisers) the market shrinks.

Read my article on IFA Life at http://www.ifalife.com/articles.asp?AID=1372 and the other "The Folly of Hourly Fees" at http://www.ifalife.com/articles.asp?AID=1427

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david mann

Dec 13, 2012 at 11:08

The availability of affordable PII will have greater implications on sales of structured products than any amount of marketing - basically they are dead in the water as an IFA product as PII costs will be unaffordable

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Dec 13, 2012 at 11:09

I think there is a much simpler explanation for this. Nothing to do with risk simply maintaining profits.

Business volumes are likely to drop as a result of RDR, so on a like for like basis would PI cost. Increasing the cost of PI will ensure that the PI providers can maintain margins.

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David Craik

Dec 13, 2012 at 11:13

If the FSA continues to expect the IFA market and their PI Insurers to pick up the cost of their failure to regulate - what can you expect?

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Kate Brookes

Dec 13, 2012 at 11:19

We're just the latest money making opportunity for them I'm afraid. Another example of seeing a chink of opportunity and milking it to the max. This obsession with products rather than company complaints records is ridiculous. Is an ISA a tax mitigation vehicle?

Following the EU Gender directive, my daughter will pay more for her car insurance, will my son pay less? Hell no.

Is this fair, no, probably not, but in reality what can we do? We all need insurance and they have us by the short and curlies, it's not as if we can even boycott the insurance companies in protest, we all need insurance.

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Lyndon Edwards

Dec 13, 2012 at 11:27

Isn't it time that all the professional bodies got together with Lloyds to arrange PI for all members, or is this too simplistic? The CII would be a good place to start with the amount they collect.

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Compliance Doctor

Dec 13, 2012 at 11:33

I think you will find that you now have the IFA Centre to stand up for IFAs on these issues now, as AIFA isn't actually for just IFAs anymore. Give Gill Cardy a call!

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phil castle via mobile

Dec 13, 2012 at 11:46

i agree with mpt earlier

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Barney Stackhouse

Dec 13, 2012 at 12:12

Let's face it - Structured Products were and are risky and rubbish and UCIS were just plain super-risky ('Unregulated' should give you a clue). PI insurers know that and sadly the only people who didn't or still don't know it are generally the clients who allowed their adviser to recommend them and purchase on their behalf. So if P I insurers choose to charge those in the industry who didn't give those products a wide berth then so be it. Even those who did not get involved in that market will end up paying through the FSCS levy as a result of upheld misselling claims.

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Jenny N . I FA

Dec 13, 2012 at 12:57

Ditto Kim, mine has doubled. I have only been self employed for nearly 4 years.I now have to consider another career after spending all my spare cash on exams.

After all this is what the FSA wanted.

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Bob Donaldson

Dec 13, 2012 at 13:42

@Barney Stackhouse - How can you make a sweeping statement that Structured Produts were and are risky and rubbish!

What a load of tosh!

Investing in anything where the underlying assets fluctuate in value carries risk. I suppose you think that Gilts are a safe investment or buying a house!

The problem is understanding the risk and the client accepting the risk. Lets face it keeping money in a bank account earning 1% with inflation at 3% is a risk!

Please do not make sweeping statements unless you can back it up with hard facts!

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Arthur Schopenhauer

Dec 13, 2012 at 13:59

@Barney Stackhouse

Could I suggests that learn about EPUTS, Foundations, and quoted funds on HMRC recognised exchanges

Most of these are the products that make money rather than the discredited methods where you scatter money liberally around with little regard for where we are in the economic cycle.

You then might be at risk of adding value to clients

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Steve Young (Sense Network)

Dec 13, 2012 at 14:58

We have just renewed our PII for 2013 on the same terms as for 2012 plus we no longer have an exclusion for any FSCS claims. Sense is committed to independence and, in our experience, good insurers care more about your risk management processes and track record than they do about whether you are independent or restricted.

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Will Watling (Capita Financial Software)

Dec 13, 2012 at 19:20

I have to agree with Steve Young. Some of our largest clients have renewed with single digit increases in PI ins. One of them was offered Comparator licences paid for by the PI underwriter, to demonstrate their support for the improvements they're making in their 'systems & controls' as they could then demonstrate they'd checked for potential client detriment & enhanced the value of their adviser charges when based on FUM.

Generally I've found more IFAs getting increases vs those going restricted. There's definitely an assumption by the PI underwriters that as restricted firms will be limiting providers to one or a small panel & stating up front that UCIS etc won't be advised upon; it reduces risk going forward. There also seems to be an unwritten assumption that if things then go bad, that the providers they've restricted themselves to will help to rectify the issues & so limit the amount the PI insurers may have to pick up.

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Julian D

Dec 14, 2012 at 10:04

This is old news. I notified Citiwire that ours had more than tripled overnight in August this year (for some reason they chose not to print it at the time) and we were cited by the insurance company the reasons for this being a small amount of structured products and 'a hardening of the marketplace' - whatever that means.

Thankfully we've since managed to obtain much more favourable terms with Aon and I would certainly recommend anyone considers them at renewal, as not only are their premiums very good, they haven't included any exclusions (with the exception of UCIS).

What's not been mentioned in this article is the impact on your capital adequacy. As a small practice I wasn't aware that as soon as you had exclusions your capital adequacy requirements went through the roof and only found out when completing my GABRIEL report that not only was I required to hold an additional £16,000 of capital to offset my UCIS exclusion, but also needed additional capital due to the policy excess having been increased above £5,000. Needless to say that wasn't a nice experience!

My advice to anyone is to be very wary when renewing your PI of the overall impact on your business, not just the cost of the insurance itself.

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Compliance Doctor

Dec 14, 2012 at 10:31

Thanks for that Julian D, that would bear out my testimony about adopting a robust and effective IFA risk management system to keep PI premiums low, and save your regulatory capital requirements. I have had first hand experience of this in a larger company using a system only slightly more technology driven, but with the same principles. As we show in the case study video, we helped them to manage a reduction of over 18% of their capital adequacy!

If you haven't got additional capital to increase your capital adequacy, then treat your own risk management seriously and the benefits can be manifested over the next few years as a serious multiple of the original investment. Get in touch with the Association of Professional Compliance Consultants and get to grips with risk management for your firm.

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Richard Hardy

Dec 14, 2012 at 14:20

That'll be before RSA pull out of the market next year.

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