Most of the UK’s smaller financial advisory firms opted to remain independent when new rules on exactly what constitutes independence were introduced in the Retail Distribution Review in January 2013.
However, there are growing signs that firms’ difficulties in obtaining professional indemnity (PI) insurance may threaten their ability to call themselves independent. To be truly independent, advisers need to consider a wide range of investment products, including investment trusts, exchange traded funds, structured products, venture capital trusts and enterprise investment schemes.
Owing to the complexity and risk of some of these products, many firms have been faced with a choice of either paying much more for their PI insurance (up to 50% more in some cases) or having the policy written on the basis that certain product types are excluded.
If a firm holds itself out to be independent, but some types of investment covered by the independence definition are excluded from their PI cover, then the only option is to ‘self-insure’, i.e. to hold extra capital in relation to advice given on that product. Meanwhile, advice must remain unbiased, so if an excluded product is the best option for a client, it must still be recommended.
Patrick Connolly, communications director of Chase de Vere, one of the UK’s largest advice firms, said: “Exclusions have been rising to almost ridiculous levels, meaning advisers are forced to accept a policy providing very little value.”
Graham Price, a director at UBS Wealth Management, described self-insuring as “not a practical solution for 99% of firms.”
Ways firms may be able to reduce their PI insurance premiums include:
- Becoming a chartered firm, i.e. at least one adviser within the firm holds a QCF Level 6 advice qualification
- Establishing an Investment Committee, who meet regularly to review the firm’s processes, and who conduct due diligence on investment platforms and providers
- Using independent risk profiling tools
- Using an external compliance consultant
The increases in PI insurance costs are another example of the high costs of regulation that firms face. In February 2014, Retiring IFA, an organisation which assists financial advisers to find partner companies for mergers and acquisitions, surveyed 221 adviser firms and found that, on average, firms spend 27.45% of their turnover on regulatory requirements. This prompted the financial advisers’ trade association, the Association of Professional Financial Advisers (APFA), to launch its own survey into the subject.
Chris Hannant, Director General at APFA, said: “
APFA has long campaigned for the introduction of a ‘long stop’ – a 15 year time limit on customer complaints. At present, complaints can be brought against advice given some 30 years ago, provided that it is also less than three years since the client should reasonably have known there was a problem.