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PI cover: More cost - any benefit?

Regulators are being warned that professional indemnity insurance may not be much use to a lot of investment advisers.

Friday, March 18th 2016, 6:00AM 2 Comments

by Susan Edmunds

Whether all advisers should have PI cover is one of the topics up for discussion as part of the review of the Financial Advisers Act.

The options paper says mandatory professional indemnity for all financial service providers increases the likelihood of consumers receiving compensation for loss but also adds to providers' costs.

Most professional bodies offer their members PI deals, although it is not compulsory within any association.

But Nigel Tate, former president of the IFA, said it was not useful to investment advisers in its current form. “If a client complains about a decline in the value of their portfolio, professional indemnity does not cover it.”

He said its most practical application was in cases where it was necessary to cover the cost of a legal defence.

“Most advisers have it but I don’t. My disclosure statement says I don’t have PI cover. I’ve had 29 years with no complaints. If I do something incorrect I put it right,” he said.

“It’s very seldom things go wrong to the extent that a client would lose all their money. In the past when advisers were putting people in finance companies there was that possibility but there have been good learnings out of that period and most advisers are giving advice with an element of diversification, portfolios that are directed specifically at an individual client’s needs. It drops the need for PI cover.”

SiFA echoed some of Tate’s sentiments in their submission on the options paper.

The group said regulators must understand the limitations of professional indemnity cover.

"Investment advisers actually can’t obtain material coverage for the thing that the consumer would expect the adviser to have. While financial adviser policies will meet claims where the adviser or his staff have stolen the client’s funds, or where the adviser has failed to carry out a legal instruction from the customer and the customer has suffered loss as a result, except in very limited circumstance an insurer will not respond where the loss has been caused by the fall in value of investments even if the adviser has been held in a court to have provided negligent advice.”

But former PAA president Peter Leitch said it was beneficial for advisers to hold PI cover.

“Ultimately it’s there to protect themselves. It protects the client in a sense but most importantly the policy is there to protect advisers from the risks associated with running a business, particularly when you’re providing advice to individuals and businesses.”

 

Tags: Nigel Tate Peter Leitch professional indemnity

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Comments from our readers

On 18 March 2016 at 12:27 pm Graeme Tee said:
I agree entirely with Nigel Tate and our firm takes the same view – that is best practice is the best defence. But what nonsense from the Ministry of Business Interruption - it looks like powerful lobbying from the insurance companies to me.

Obviously there is no benefit to clients of insurance companies paying advisors’ legal costs to defend their incompetence - how many private clients have insurance to pay their legal costs? Furthermore, having the backing of PI insurance gives less honest advisers encouragement to be less honest.

What MBIE should be proposing is for advisers to have no PI insurance. That way their own wealth is on the line, same as their clients. With skin in the game advisors have the best incentive to act in clients’ best interests and if not, they could be bankrupted so they can’t act in the industry. That would be a greater penalty than any disciplinary committee would hand out.
On 18 March 2016 at 2:35 pm Brent Sheather said:
More nonsense from the Ministry of Investment Banking. We need an options paper investigating the amount of money wasted by the Ministry of Investment Banking. Another hypothesis to test is whether the Ministry is just staffed by people who have failed in the private sector. Potential PhD thesis there.

Regards
Brent Sheather

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