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[The Wrap] Industry blindsided by PI decision

Professional indemnity insurance has been a sleeper issue for years, but this week it woke up and shook its feathers.

Saturday, December 12th 2020, 7:02AM 4 Comments

by Philip Macalister

The key development was that NZI, which we understand has around 60% market share, said it will no longer cover financial advice firms with three of less advisers.

Judging from the transitional licensing numbers issued by the FMA that is likely to be the majority of the industry.

This decision by one player is likely to reshape the whole financial advice industry in the future. The options for advisers are operate with no PI cover, exit or join a big group.

This totally flies in the face of what the Ministry of Business, Innovation and Employment and the Financial Markets Authority has been saying for years.

Their mantra has been that small advice firms will be able to operate under the new Financial Services Legislation Amendment Act (FSLAA).

One would have to doubt that is the case.

Comments from the FMA are a head scratcher. Boiled down they seem to be saying PI is not necessary; there have been few claims over the years so it’s pretty much redundant cover – why pay for something you don’t use?

And then the comment “back yourself”.

Meanwhile, MBIE, which is the architect of the new rules would only issue the following statement:

Whether an insurer chooses to provide cover in a particular situation is a commercial decision for them. However, MBIE and the FMA will be keeping watch on how PI insurance is affecting financial advisers’ decisions about how they set up business.

Judging by comments on the Good Returns stories some think it is possible to operate without PI, and there may well be some cases where that is possible.

Advisers I have spoken to say they would rather exit.

One said while he has had PI cover throughout his career, he has never had to use it. However, he would not risk his business without it in the future, especially as was nearing the end of his time as an adviser and did not want to risk losing what he had built up. Also he said if markets took a downturn (which is quite possible now they are so high) then the probability of a client making a complaint increases.

Removing PI cover also will have a big impact of some groups and associations. For a number of them their PI package was one of their unique selling points, and an important revenue stream. If they can’t offer that to some members then their existence is threatened.

Financial advice has strived to make itself a profession; any profession worth its salt needs to have PI insurance available.

How one company can blindside the regulators and reshape a whole industry is unbelievable.

I wonder if what NZI is doing would be considered good conduct?

Tags: FMA MBIE Opinion PI

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Comments from our readers

On 14 December 2020 at 7:16 am Pragmatic said:
Here's a neat idea: why doesn't the industry body (you know - the ones that represent the interests of the industry) approach other insurers to develop a relevant scheme for the NZ industry?

I give you a hint: look in the Australian white pages (or contact the various Australian industry bodies for some guidance).
On 14 December 2020 at 8:53 am Matron said:
@Pragmatic that would be somewhat ironic given that the industry body (FANZ) were the ones that lobbied for the removal of the PI requirement.

Own goal, or something more cunning, do you think?
On 15 December 2020 at 1:12 pm Eyeinthesky said:
There is another issue here that could seal the fate of many, unless there is a significant change - many product manufacturers (both investment and insurance) require their agents ( advisers) to hold PI cover.The advisory force is essential to many of those product manufacturers.

Either those arrangements will have to change, or another PI insurer steps up, or a lot of people are going to be without income in the new environment. Another possibility is amalgamations of unwilling groups of advisers under FAPs that they don't really want to be part of.
On 16 December 2020 at 12:21 pm All hat no cattle said:
ah the old 'kick FANZ because somebody did/said something you don't like' trick.
Never far away is it? The only surprise here is the speed of its arrival.
The thing about these comments is they serve double duty: 1- the call that somebody should do something. Not the caller though, they are usually not offering to actually do anything, just shrieking for someone else to. And 2- they self aggrandise as though they thought of it first, while insinuating that the thing they think someone else should do is not already being done.

Well played...?

I sure hope the saddle is well strapped to that very high horse of yours, lest you fall off.

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