Independent advisers plunged into crisis

Insurers' unwillingness to offer cover puts thousands of small IFAs in jeopardy. James Mawson reports

An insurance crisis is threatening the future of thousands of independent financial advisers (IFAs) and potentially putting millions of consumers at risk.

Professional indemnity (PI) policies are meant to protect clients who are badly advised. But the insurance industry is in crisis and is unwilling to cover small IFAs as they are seen as a bad risk.

It is a legal requirement for all IFAs to have this PI cover. The Financial Services Authority (FSA), the City regulator, has recognised the crisis and is expected to bring out a paper before November stating its position and relaxing its strict requirements on the need for PI cover as long as the risk to consumers is not increased.

Last week, the FSA started writing to 1,200 adviser firms struggling to renew their insurance before it runs out for them next month. These letters offer guidance on what advisers can do if the cover provided does not fully comply with the current regulations or if they cannot find any cover at all.

In the letters, the FSA says advisers should voluntarily stop trading if they cannot find insurance – or action will be taken to shut them down. But if the cover found is not fully compliant with the requirements – for example, because the excess levels where the adviser pays the first few hundred pounds of any claim are too high to make the cover practical – then the FSA will examine each case individually for the risk to clients and decide if the adviser can carry on trading.

However, those unable to find cover are already defying the FSA's orders. Philip Evans, an adviser based in Wales, has been unable to find a new PI insurer since his previous provider, Dixon and Manchester, pulled out of the market in the late summer.

This failure to find a new insurer has come despite Mr Evans calling 15 brokers still in the market and not having any history of claims. As a result, he has been trading without insurance and has ignored FSA requests to stop trading voluntarily. He said: "My livelihood is at stake through no fault of my own and I am not prepared to roll over and give up."

The intermediaries' trade body, the Association of Independent Financial Advisers (AIFA), said it could take months or even more than a year for the FSA to stop advisers without cover from trading with clients. Fay Goddard, the AIFA's director of policy, added: "The PI market has hardened so there is little capacity, and what little there is, is not going to IFAs. All professions have been hit by high increases and excesses but IFAs are seen as a poor risk.

"If an IFA cannot renew with their existing provider, either because the insurer has left the market or they are cherry-picking, they will find it almost impossible to get cover elsewhere."

Howard Flight, shadow chief secretary to the Treasury, is writing to Chancellor Gordon Brown and Sir Howard Davies, chairman of the FSA, about PI cover. He said: "This is a serious, practical problem. The last thing the public wants or needs is to lose financial advice because the IFAs are unable to comply with PI requirements. This problem has been coming for over a year."

The Treasury said: "There has been some increase in PI premiums, but there is no problem in availability and certainly no market failure [and so no need for the Government to provide alternative insurance]. We will continue to monitor the situation."