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Structured products: Advisers seek solution to soaring PI costs

by Rachael Revesz on Nov 19, 2012 at 10:45

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

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6 comments so far. Why not have your say?

IFA Solutions only offer FSA compliant policies with no product exclusions

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‘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.’

That will be the FSCS

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so the FSA say that we should look at all investments for our clients, before choosing the most appropriate. but if we choose structured products we would not be insured.

work that one out......

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You dont have to be insured for all product areas. But if you arent covered for a particular area, you need to hold additional capital.

That's why we decided not to recommend capital at risk products - the cost of us having to possibly find the additional capital meant that the amounts that clients, who held the products, would have to pay us to cover our costs (including the potential cost of raising the additional capital if it was needed) was a lot greater than the potential returns for the products. We didnt think that clients who didnt have structured products should subsidise those that didnt.

We tried to speak to structured product providers about this two or three years ago. They werent interested, they just wanted us to sell their products and not care about the consequences for our own businesses.

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The issue is not so much structured products themeselves it's the knowledge and client fact finds of the advisers.

Advisors that can clearly demonstrate their knowledge of investments being proposed to clients coupled with robust and clearly evidenced fact finds (that provides the neccessary risk warnings that is acknowledged by the client and appropriately recorded by the advisor) would in most circumstances demonstrate to PI insurers their professionalism and should not warrant product exclusions on their PI policies.

PI rates are hardening generally due to Arch Cru, Keydata and UCIS issues. The collapse of Connaught is yet hit PI insurers, so rates will continue to harden!

The FSA / FSCS approach to PI is fundamently flawed, Advisors are having to pick up the bill via FSCS levies for failed advisor firms. There would undoubtedly be far less burden if "run off " cover was made mandatory which it is for professionals such as solicitors, chartered accountants , RICS surveyors etc !

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Julian Stevens

Nov 19, 2012 at 18:16

As a member of a network that operates an approved panel of (I presume) rigorously analysed structured products and its own PII company as well, we're pretty safe on this issue. At least, I sincerely hope we are. That doesn't mean we're absolutely barred from using any off-panel structured products but we have to make a pretty thorough and convincing case if we want to. Membership of a network these days is as much about steering its members clear of dangerous waters as it is about providing a buffer from the regulator. Amen to that.

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