Advisers should talk to advisers about professional indemnity

Curated Risk's Clinton Stanger, who has more than 22 years of experience in the insurance industry, says it may be obvious to some but getting advice from specialised insurance advisers regarding PI cover would be a smart move.

Stanger says he's been signalling changes to PI cover for at least 18 months and with so much confusion around the increasing cost and availability of PI cover, it would make sense to speak to an expert.

He also says while the New Zealand Financial Services Group (NZFSG) and Financial Advice New Zealand (FANZ) have offered extensions to advisers waiting for group PI cover, advisers should act now and not leave it to the last minute.

According to Stanger, NZI, TAP, My Solutions, QBE and Dual NZ are offering PI cover to Kiwi advisers but a lot has changed since the new financial advice regulations came into force in March.

Regarding premiums, he says that "the market price is the market price and either you like the market price or you don't".

"Insurers in this space have got the same duties of conduct as we all have and they can't rort a premium to give themselves a large profit - they've got to base it on their experience and perceived risk."

Stanger says other PI issues advisers should be thinking about are new policy wordings, whether they should be insured under a Financial Advice Provider (FAP) or as an Authorised Body (AB), as well as renewals, runoff cover, defence costs and policy limits.

"We are talking to advisers who are engaged by a FAP who they are actively trying to disengage from, and since 15 March it has become substantially more difficult to disengage from your current licenced FAP.

"If an adviser is an AB or engaged by a FAP licence, and they now want to leave that FAP, then this is an added complication."

He says for risk advisers the importance of the wording and differences between products is significant and this is no different when it comes to a professional liability programme.

"It seems in the rush to market this year the importance of the actual contract of insurance has disappeared.

"Even with a retroactive date which covers your past advice, a claim or circumstance which is notified after your new programme incepts is covered by that programme and that wording.

"It does not matter what bells and whistles sat in the previous year’s wordings, the only policy which applies to a future claim is the one you select to insure with this year."

Comments from our readers

On 7 July 2021 at 9:42 am JPHale said:

I can't echo this loud enough, I've talked in another article about advisers being treated as wholesale clients, and they are under FMCA.

If you are a Financial Adviser and not a F&G liability specialist, then you need to seek advice on what you need and how to structure it.

On 7 July 2021 at 10:37 am Murray Weatherston said:

My [hopefully]educated guess is that over 80% of FAPs and financial advisers will not be able to get AND afford standalone PI cover.
So the greatest proportion of them will seek cover under group schemes. If history repeats itself, anyone who asks to see a copy of the group policy will not be allowed to see it - historic reason was often "our scheme has features that other schemes don't have and we don't want our competitors to find out...".
Group PI is often one of the few USPs for an association.

On 7 July 2021 at 11:27 am cstanger said:

Murray, you are correct some Associations guard their PI wording fiercely, however others are different. As the rating basis has shifted in the market the difference between premiums under a group scheme and on a standalone basis has significantly decreased. The strategy that I have spoken to advisers about over the past 12 months is to create that point of difference, or USP, in their own business. Why is your adviser business better than your peers, what processes do you have which means you are more deserving of the short capacity from insurers in this market, and what risk management do you actively employ which lowers the perceived risk.
CS

On 7 July 2021 at 5:23 pm JPHale said:

@Murray which raises an interesting issue, the one of disclosure required on the financial instrument being acquired or disposed of.

How is an adviser expected to make an informed decision on the policy or even run their business if they don't have access to the policy document?

Especially when the FA is treated as a wholesale client and doesn't have any information to make a decision on?

The fact this has prevailed shows that the past rules were not adequate to govern and regulate, if you don't need to understand your PI to avoid not being covered, then while you're blind there you're clearly not tripping over anything concerning either.

Under the new rules hiding behind a smokescreen is not how it's intended, and an association trying to play those games is likely to put themselves in the middle of a regulatory issue as they aren't the adviser but they are involved in the advice.

A recent PI cover I had reviewed by a specialist PI adviser for a client said the right things on the front cover but specifically excluded the activities of the business being insured. Somewhat of an oversight don't you think? And this cover was provided by one of the bigger F&G advice providers.

I don't see this case being too different from "trusting" the industry body has it right, when it could be complete smoke and mirrors.

It's been said before, and will continue to apply, caveat emptor

On 8 July 2021 at 2:37 pm Murray Weatherston said:

@JP
I would be interested in the chapter and verse as to why a FA would be considered as a wholesale customer for a PI policy (about which not many FAs would have much of a clue)

On 9 July 2021 at 8:58 am JPHale said:

@Murray, so was I apparently it is in the financial markets conduct act...

Repeated from a credible source that I am yet to go and find in the act which is one of my jobs today

On 9 July 2021 at 9:06 am cstanger said:

I'm with you Murray, Curated Risk treats all clients as retail customers, and our statement of services is relatively straight forward. Even clients who are professional bodies, compliance consultants in the industry are retail clients to us.

On 12 July 2021 at 11:53 am JPHale said:

@cstanger while this is good, and all advisers advising advisers outside or their specialty should take this approach, it’s not in the rule book that way.

@Murray, coming back on chapter and verse.

The Financial Markets Conduct Act 2013 states that there is an exclusion to provide disclosure to wholesale investors Part 1 - 3(2)(a) relating to an investment business.

And Part 3 - (1)(a)(iii) states that a business is an Investment Business if they are providing a financial advice service.

Now that covers disclosure, not documentation of advice or giving advice, at the same time this has fallen into the category of caveat emptor in the past.

If we have a closer look at FSLAA

Part 2 - 63, section (5) amended (Meaning of financial service)
(5), insert after section 5(lm)
(ma) (ii) market services license exemption under section 389(b)(b) FMCA 2013 - exempting wholesale.

And digging further, schedule 5, part 2, exclusions from financial advice.
16(3) not regulated financial advice if: (a) offer of financial product from offered and (b) excluded from disclosure in Part 3; which I covered above.

So basically if you are a financial adviser giving advice to other financial advisers that is wholesale advice and is except from both disclosure and the requirements of regulated financial advice.

Risk to investment to mortgage to general and all in between... Happy days huh?

Again, great that cstanger is taking this approach, as other are, but technically not the law as it appears to be written....

As I said caveat emptor.

Advisers should talk to advisers about professional indemnity

An experienced insurance adviser is urging financial advisers to heed their own advice and speak to an expert when it comes to Professional Indemnity (PI) cover.

Wednesday, July 7th 2021, 6:02AM 8 Comments

Comments from our readers

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