by Jon-Paul Hale
Many commentators have been saying things like "insurers are taking advantage" through to "there's no justification" - and that may be fair in light of the lack of transparency from PI insurers on the subject.
But hold those thoughts for a second - what if they have their reasons and those reasons are best left unsaid?
What follows is my opinion drawn from my understanding and experience of our industry and its changes. There is no direct commentary from PI insurers or regulators on this.
Let's start with the basics of how complaints work.
When an adviser has a complaint, it can go one of two ways - it's either handled internally or within a dispute resolution scheme (DRS).
Through either process, your PI insurer needs to be notified, and depending on which direction it goes, there's usually some form of settlement.
It gets interesting when a DRS is involved because there's a cost to having a complaint heard by a DRS, the decision of a DRS is binding on the adviser, and the PI insurer largely tags along for the ride.
The typical approach to managing this is to settle, right or wrong - the cost of not settling is usually more than the cost of dealing with it quickly by settling.
A good number of complaints never see the light of day with a DRS service because it increases the costs for the PI insurer and the adviser.
It also increases the visibility of complaints with the publication of confirmed and settled complaints and it ultimately increases the overall cost of claims for the PI insurer.
As a result, we have little visibility of the actual complaints and the number of complaints settled as settled complaints typically have a gag clause attached to them.
When you step back and take this into account you start to understand why the insurers are reacting the way they are.
For example, and setting aside best practice and desirable business operations for the moment, under the old rules, a life insurance adviser had little in the way of compliance they had to adhere to - pay your fee to the FSPR, belong to a DRS, have a disclosure document - and that was it.
Advice could be written on a wet paper napkin and thrown in the bin on the way out of the bar. There wasn't anything the FMA or regulators could do about it.
The FMA has said this in the past, and it has been a key driver on the FAP requirements around documentation.
As a result, it had been difficult for RFA life advisers to come to grief in the legislative process. However, it's somewhat different from an operational complaints process and thus where the PI story picks up.
For both advisers and PI insurers, the commercial reality is that it's better to handle a complaint internally to avoid the public reporting and extra costs involved in the DRS process.
Also, the PI insurer can negotiate directly with the complainant. Things can get tied up in a neat bow and placed under a confidentiality agreement when a settlement is reached.
This then leaves us with little visibility on what has happened with complaints and PI claims. And the insurers (not the PI ones) also encourage this as they don't want the brand damage associated with a public complaint.
My time both with insurers and as an adviser have seen these approaches in action. And the approach is very much sweeping it under the rug and making it go away.
So when I heard about PI insurers making noises about withdrawing from the Class 1 and 2 advice market, I wasn't surprised.
Suppose PI insurers had complaints and claims that resulted in settlements under the old rules where it was difficult to justify anything that broke the old rules.
The risk to the PI insurer under the new regulations and required transparency means their risk is exponentially higher.
We know that single adviser businesses have been struggling with the March 15 changes, and most have gaps to some degree or other.
Also, the reports on the simple stuff, registration linking of the FA to FAPs not being done, will give the PI insurers worms as this is one of the more basic requirements.
Additionally, as a PI insurer, you don't want to come to market and explain this, as it's bad for business.
It opens the door on;
- The regulator asking more questions, and with greater visibility comes more monitoring.
- Increased complaints on the back of the published success of other complaints.
- More focus on the things that have resulted in the successful settlement of complaints, either as claims by clients or from increased regulator monitoring.
- And finally, significantly increased costs could kill the golden goose as PI gets priced out of the market due to the operational requirements not being met. Market distortions like no small independent advisory businesses.
Anyone who has read what I've written in the past will be aware my view is that better disclosure and client education is a good thing.
I'm not suggesting that hiding complaints is the way forward, more that the commercial reality of increasing the focus on complaints drives a protectionist culture within advisers.
Long-range ass-covering becomes a more significant focus to getting it right for clients. You don't step into a lion's cage without protection, the same applies to this in the extreme.
There is a balance, address the genuine complaints and manage them well, but don't encourage frivolous complaints that can be taken care of in the playground.
Caveat emptor, the next couple of years are going to be interesting for all of us. How the new rules shake out in actual regulation and the level of complaints that clients bring are significant points to watch.
The complaints and issues aren't going to come from the usual suspects. Increased disclosure to clients isn't necessarily going to result in clients understanding that they have pathways.
The documentation is still long and complex, and clients are less inclined to read it. But they are happier to sign it off because all the proper headings are there.
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