Fair? 

In the wake of the UK's entirely avoidable PII Meltdown, and as Advisory firms do their best to adjust to the lack of supply of Professional Indemnity Insurance, we're getting to hear the word 'Fair' (or rather, it's converse, 'Unfair') bandied around quite a bit.  It's a natural response.  After all, with premium hikes of between 200% and 500% (if you can get cover), usually on the back of little or no exposure to claims, this is simply not the kind of thing which is explicable according to the normal rationale of supply and demand, or even of risk.  It seems reasonable to be paying more for one's insurance, if one had actually done something to deserve such treatment - but that's not the case here.

Indeed, there is nothing 'fair' about this at all.  The intel that ValidPath have obtained, at the highest level, indicates that insurers are pretty much done with the practice of being the regulator's patsies in the redress game.  For years now, the PII Underwriters have been accumulating a wealth of experience, based upon actual claims, indicating that the FOS is enforcing redress payments even where there is no actual evidence of advice having been given by advisory firms.  That strongly echoes our own experience, and goes a long way to explain how the PII market has collapsed from around a dozen providers in 2018 to just three right now.

If you are looking for words to describe the IFA market as it is currently being regulated, 'fair' is not one that comes even close.

But that doesn't mean that we should forsake using it, building it into our own principles, and treating it seriously as a key component of our values.  After all, even the FCA, many years ago, coined that acronym 'TCF'.  Remember  that?  If the regulatory bodies have consigned the very idea to the bin of history, that doesn't mean that we should seek to emulate them.

Long-term ValidPath Members will recall that our consistent practice over many years has been to 'suck up' those ad-hoc demands for money that come along relentlessly, such as the 'FSCS Interim Levies'.  These invoices arrive with little warning, are often for very substantial sums, and are payable within one month.  I do not know how 'normal' businesses would cope with this, operating within competitive trading environments, often with tight margins.  Of course, financial intermediaries are not 'normal' in that sense, given the essentially conflicting nature of FCA regulation, and the now substantive risks posed by it.  But the important thing here is this:  despite the operational stresses created by the regulator, ValidPath's sense of 'fairness' has not deviated.  Members will not have been aware of this latest, egregious, financial demand because we have done what we have always done, in order to endeavour to protect you.

Of course, that capacity for financial protection is not limitless.  One of our Members recently used the analogy of a With-Profits Fund, in order to describe how ValidPath has sought over the years to iron out the otherwise unmanageable fluctuations in regulatory overheads - and this bears some passing resemblance to our approach.  However, we'd need to be charging a whole lot more than we do in practice, in order to simply 'suck up' the unimaginable hike in PII premiums for 2020.  Granted, we're able to absorb a fair proportion of the additional cost, but for the rest, we need to find ways of spreading the burden.  After all, even though the FCA has somehow managed to transform PII into a largely worthless form of cover, it is still mandated by the regulations - so there is no escape.

So, we're trying very hard to do this fairly.  That means tackling a difficult issue in a way that is principled and proportionate, which sets the right stress on the actual numbers and liabilities.  And we fully recognise that, even when we employ our best efforts on behalf of our Members, that's not going to somehow make any of this fair.  For that, we'd need a magic wand.

 

Kevin Moss, 06/03/2020