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PI cover in doubt for small adviser firms

MBIE and FMA have long assured small advisory firms that they will be able to operate under the new licensing regime, but major insurer NZI has quashed those assurances.

Wednesday, December 9th 2020, 6:17AM 19 Comments

by Daniel Smith

Katrina Shanks

NZI, which is understood to cover 60% of the financial advice sector, has written to the Triple A advisory group saying it will no longer cover advisory firms with less than three people.

In the letter NZI National Relationship Manager Andrew Jollands says the insurer has committed to providing professional indemnity insurance to FAPs with three or more advisers. Effectively blocking a large part of the industry from accessing PI insurance through NZI.

The letter shows a hard reversal from the insurer’s previous position on professional indemnity.

“Following our earlier advice that NZI would no longer underwrite financial adviser’s liability, we have reconsidered our position.

“As originally advised we were concerned at the significant exposure generated from multiple individual advisers’ limits of indemnity for the minimal premium generated. In addition, uncertainty surrounding the future of financial adviser claims arising from the new regulatory environment meant we could not effectively measure the future exposure.

“NZI will only insure type two adviser businesses licensed as financial advice providers (FAP), with three or more advisers. Our concern is, with the level of compliance required under the new regulations, a one or two adviser firm will not have the capacity to maintain their advice levels, their ongoing education, along with all the compliance.”

The move does not bode well for single adviser FAPs and reveals how insurers will have a huge impact on influencing the shape of the market under the new regime.

Triple A outgoing chief executive Wayne Smith says NZI's decision is "completely inconsistent" with all the consultation over the years around the new regime and totally at odds with what the FMA and MBIE have been saying.

He says advisers may end up exiting the industry or amalgamating into bigger groups, however there is no assurances that PI insurers won't change the rules later and and increase the minimum adviser firm size from three. 

Katrina Shanks, CEO of Financial Advice New Zealand has said that this move will have large repercussions across the industry. “We know that over 50% of those who applied for transitional licences are single adviser firms, and 28% have less than five advisers.”

Shanks says that the concerns about a move like this is what initially drove Financial Advice New Zealand to lobby hard against PI’s removal from the final full licensing conditions.

“We were concerned that there were indications in the marketplace that NZI were looking at reducing their cover. We wanted to make sure that financial advisers could still get a licence regardless of what was happening in the insurance marketplace.”

Although NZI retracting their cover from single advisory FAPs will feel like a huge blow to confidence for many advisers across the market, Shanks is quick to find a silver lining.

“There is opportunity for other providers to come into the marketplace now. There will be a huge gap in the market and that is exciting. We could see some really innovative products and services. This decision also allows opportunity.”

To any small financial advice firms feeling this as a squeeze Shanks says: “I believe that these companies provide an invaluable service to New Zealanders. I think that they will be here providing financial advice in the long term. They are the ones that have the trusted relationship with clients, they are the ones that will be very successful in the new environment.”

But, in the meantime Shanks believes that it is best practice for advisers to have PI insurance. Those one man bands who were previously serviced by NZI, will have to find somebody else to insure them.

Overall Shanks is positive that this move will not cause an exodus of single advisory FAPs. “I don’t think that one provider saying they will not provide PI insurance will drive financial advisers out of the sector. I think we are going to see new providers come in with new products and that is exciting for advisers.”

Good Returns has asked NZI for comment and is still awaiting a response.

Tags: Financial Advice New Zealand Katrina Shanks NZI PI professional indemnity

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Comments from our readers

On 9 December 2020 at 7:45 am Murray Weatherston said:
Call me stupid. But if NZI can't make a business case to insure 1 and 2 adviser entities in the new world, what makes anyone think that others will be rushing in to fill the vacuum?

Maybe officials might to look at this as a "market failure" and either suggest Government set up a default PI insurance arrangement or worse, force NZI (and other insurers) to provide cover! [Lest anyone is misled into thinking I'm serious with these suggestions, let me disclose my tongue is very clearly in my cheek]
On 9 December 2020 at 8:31 am LNF said:
@Murray. 100% on the nail
Fact. The NZ market is IAG or Suncorp
"There will be a huge gap in the market and that is exciting" - Yes there is a huge gap and no it is not exciting
The only possibility is a liability specialist insurer and there is only 1 that I am aware of
Afraid to say, but the day of the one man band is over. Sole agencies coming back
On 9 December 2020 at 10:00 am w k said:
traffic flow on highways were slow. on-ramps were created to slow down the number of vehicles entering the highway. it was called "a success" because traffic is now moving faster along the highway.

in the meanwhile, back-logs are being created, and traffic jams that were never experienced before, appeared around all the on-ramps.

well, it happens, and the financial sector is no exception.

On 9 December 2020 at 10:02 am Brian Klee said:
Remember how the Law Society resolved the Renshaw Edwards shambles? If I recall correctly, every lawyer in NZ had to cough up $5,000 to the Law Society and they created their own Indemnity Fund.
On 9 December 2020 at 10:02 am dcwhyte said:
The end of days for the one/two-man band was heralded with entity licensing - note the FPA in Australia recommending a move away from entity licensing.

The tied or "sole" agency was de facto re-established with the introduction of Nominated Representative status, thus taking the consumer and the industry back 30 years to the old mother mutual product flogging days.

The continued refusal of officials to distinguish between product sales and financial advice will serve the consumer poorly.

The tightening of the PI market was predictable - again see the Australian experience - and serves as another nail in the coffin for the one/two-man band operators.
On 9 December 2020 at 11:04 am Matron said:
@lairdoftakapuna is quite correct. Entity licensing will only serve to restrict access to impartial advice. It's only benefit is to the FMA to allow them to control the market more easily, not to the end consumer.

Individual licensing is only mechanism that fosters personal accountability and will grow the Adviser market.

It will take another 10 years for that penny to drop before the regime is tweaked, again.
On 9 December 2020 at 11:06 am Pragmatic said:
I must be missing something here, as it seems that this is a report on NZI's decision to simplify their operational gearing that they achieve through targeting larger firms. I haven't read this as anything more than commercial opportunism... with industry participants still able to access alternative PI insurers.

Given the geographic & "cultural" dispersion of the NZ advice industry, I personally believe that it will be difficult for FAP aggregators longer term - with the NZ industry naturally lending itself towards a fragmented community of advisors.
On 9 December 2020 at 11:56 am Paul Flood said:
If other PI insurers follow suit then this will have interesting implications for small adviser businesses.

While holding PI cover will not be a requirement for a full FAP license, it is a condition for every distribution agreement my business holds with life and health insurance providers.

It is no use having a FAP license and no distribution agreements. Interesting times ahead.
On 9 December 2020 at 12:48 pm Murray Weatherston said:
Dear Pragmatic
Yes you are definitely missing something.
You think you are looking for another restaurant or bar in Ponsonby Road, Parnell Rise or Mission Bay.
You are really in a 10 person town and your favourite restaurant has just closed its doors for good and you are 200km from the nearest town.
Get the picture?
On 9 December 2020 at 12:57 pm Murray Weatherston said:
@Brian Klee
My recollection of Renshaw Edwards is slightly different. Recall they were both stealing from the Trust Account and neither knew what the other was up to.
In those days all lawyers belonged to a Fidelity Fund. They hadn't twigged that they all were in partnership with each other. The loss on RE exhusted the Fund and more, so the per practising certifictae (I thought it might have been $10K) had to be levied to keep the Fidelity Fund solvent.
It was shortly after that they changed to the new system where only designated funds in their Trust accounts were covered.
On 9 December 2020 at 2:49 pm JPHale said:
Interesting comments, where one sees adversity another sees opportunity.

The question is; is this BP putting up its rates by 5c waiting for the rest to move or will we see them back where they were by Monday? (Thanks RT)

We know aspects of adviser businesses were and are being impacted by the change coming, the industry, on the whole, has been very slow to move; engage, contribute, understand, and now adapt. There will be solutions for advisers from PI insurers, it may not be the insurers we are familiar with or have considered in the past.

I have banged on about tied agency drivers and the costs for what is coming for two years. Largely being ignored or told, "Nah that won't happen". Well here it is and it's going to be a case of suck it up princesses or there's the door.

I may not have quite the pessimistic view of Murray about independent advice, however, I have a similar view to Murray about advisers, by and large, coping with the level of change required in the remaining time left. It's a vertical learning curve and it started at the beginning of November if you hope to be ready by March.

I can hear the gnashing of teeth already, as advisers too slow to wake up demand from their BDM's a solution to their problems. Forgetting that most providers have been making noise or doing something to help for two years.

Surprise is not a reaction anyone should be having, we have been told.
On 9 December 2020 at 6:16 pm Amused said:
“NZI will only insure type two adviser businesses licensed as financial advice providers (FAP), with three or more advisers. Our concern is, with the level of compliance required under the new regulations, a one or two adviser firm will not have the capacity to maintain their advice levels, their ongoing education, along with all the compliance.”

Hmph….I thought when reading the above that it had come perhaps from a dealer group scaremongering for its members to operate under its own FAP licence. But no this is actually an insurance company speaking here. How disappointing.

Statistically the chances of a professional indemnity claim occurring at a larger FAP with many advisers present is much more likely than a one or two person adviser firm. Is NZI forgetting also that Dispute Resolution Schemes are mandatory for all advisers nowadays and that these schemes in theory make the likelihood of a customer complaint resulting in a PI claim much less likely?

The annually published stats show that house and general insurers get the vast bulk of customer complaints made against them each year. Not financial advisers. I would love to see NZI share with the adviser community the actual PI claim stats made against advisers in New Zealand for the last 5 years. I suspect that it is a very short list. I honestly cannot recall when I heard of an adviser locally who had had a PI claim made against them.

I’ve done this for almost 18 years now and like the majority of advisers operating I’ve always put my customers best interests first. As Paul Flood notes the providers are the one’s who have insisted that advisers hold PI cover to have agreements in place with them. I have flushed the better part of $25,000 down the toilet now paying for cover which in all likelihood I will never need to call upon. However PI cover is a current requirement to operate in the financial services industry and I recognise the importance of having it.

This announcement by NZI sets a new low for the Insurance industry and illustrates a very poor understanding of the statistical likelihood of a PI claim actually been realised against a financial adviser.

Licensing of the financial services industry once in place will measurably improve the quality of all advice been given to customers. The very small number of complaints currently been made against advisers each year will decrease even further and PI claims whilst they may still occur will become a very rare event indeed.

As Katrina Shanks correctly states other providers will come into the market if NZI ultimately decides to exit. I guess my next question for PI insurers reading this is to ask them when can advisers expect to see the cost of their current PI premiums reduced? Insurance companies after all price their premiums around risk of a claim been realised and given the above going forward now the chances of a PI claim occurring is significantly reduced.

On 9 December 2020 at 11:58 pm said:
PI Insurers don’t hold a separate bucket of premium funds for each profession they insure. Today’s bucket of premiums is probably still paying off the claims against Architects, Quantity Surveyors and Engineers involved in historical leaking homes / building settlements. It is scary how a claim may arise, from a simple misunderstanding of a client’s instructions to the more serious negligence end of the spectrum. Personally operating without PI cover would be like leaving my house uninsured. For the 21 years I paid PI premiums I never had any claims. However I notified the Insurer of many probable claims. As soon as I heard a client say “I’ve got a problem / complaint” I wrote and notified the PI Insurer. I’m also sure a number of others will step up to plug the AIG / NZI hole.
On 10 December 2020 at 12:08 pm Murray Weatherston said:
Telling an insurance company they don't understand risk is a bit like telling a Michelin-starred chef he doesn't know how to cook

Can you identify who all these new companies who will be rushing in with new offers are?

Would you tell all insureds who have life insurance and didn't die last year; or all car owners who didn't claim on their policies last year; or all medically insureds who didn't have an operation last year - also wasted their money? I think the lucky insured is the one who didn't have a claim.
On 10 December 2020 at 12:43 pm Paul Flood said:
@Murray - I certainly won't be suggesting to my clients that they have wasted their money.

However, I am tossing up whether to suggest to clients that insurance is all very well and good, but they really need to start backing themselves and take the bull that is life by the horns.
On 10 December 2020 at 12:43 pm LNF said:
They know the stats. And to all the comments about other insurers, they weren't there prior to this announcement and they won't appear from nowhere and if they do the premiums will sky rocket
As regards the claims / premium comments. Age old expression. "it is better to have it and not need it than to need it and not have it"
I have a long time in the risk industry and I am going to exit
On 10 December 2020 at 12:55 pm Amused said:
@ Murray
Respectfully you’re missing my point. NZI’s belief that a one or two person FAP business is going to be more at risk of a PI claim just doesn’t stack up.

NZI’s logic is flawed because the majority of one or two person FAP businesses operating under a licensed advice industry are going to be the experienced advisers. The newbies to the industry and those other advisers who aren’t particularly great with their paperwork and advice processes are going to be the ones operating under the safety net of a dealer group FAP license. And the bigger the FAP the greater the likelihood of a complaint been made as the groups will well be aware of themselves.

John Botica from the FMA has been quoted this morning as saying the actual number of PI claims against advisers over the last 10 years is very small so NZI have made a rash decision with this announcement.

I think that because of the new advice regime ahead NZI probably realise the cost of PI cover is likely to reduce now so they have made a commercial decision not to offer cover to small advice firms i.e. those with the experienced advisers unlikely to ever have a PI claim made against them.

On 10 December 2020 at 4:14 pm valkyrie6 said:
NZI have rocks in their head surely if they think smaller FAP licensed businesses hold more risk, the advisers out there that have poor ethics and bad practices will emerge /hide themselves in behind the largest group FAP license they can find.
I also think the timing of this announcement from NZI is interesting within itself, just before the deadline for the transitional FAP license requirements, is NZI being influenced by the large overseas owned dealer groups who want nothing more than to control the whole industry.
On 11 December 2020 at 8:18 am JPHale said:
@valkyrie6 potentially very insightful...

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