Candle in the dark Association of Mortgage

Sky’s the limit?

The urgent need for PII review

Robert Sinclair ChiefExecutiveOfficer Association of Mortgage Intermediaries

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vailability of Professional Indemnity Insurance (PII) has reduced across all professions, including construction, engineering, law and financial services.

This is because in 2018 Lloyds initiated a review of profitability, as part of its regular re-certification of syndicates, which became known as the ‘Decile 10’ review. It required all syndicates to submit plans for the worst-performing 10% of their business. Failure to produce acceptable plans would result in the syndicate or business line being placed into run-off. With 62% of Lloyd’s syndicates that wrote non-US PII making a loss over the previous six years, this line of business become one of the main targets of the review.

Client impact

According to the FCA’s RMAR (Retail Mediation Activities Return) figures, PII insurance for advice firms increased by 37% between 2017 and 2019 – from £17,540 per firm to £24,072 per firm. It should be noted that the latest figures, while published in 2020, only relate to 2019, so may only reflect the very early impact of the Lloyd’s Decile 10’ review. Even this is only part of the story. Many PII contracts have also become ‘hollowed out’ in recent years, with greater excesses and other conditions reducing the amount of cover for greater premiums. For example, some PII contracts put a cap on the number of complex cases that are more likely to result in consumer detriment, such as DB pension transfer cases. This in turn, reduces the adviser’s ability to offer genuine choice to all their clients, in a way that is not always clear and intuitive to the consumer.

Whilst firms can secure cover (in line with comments made by the FCA in its April 2020 statement on the availability of PII) we found that firms have experienced significant premium and excess increases and the options available at renewal are limited, due to shrinking insurer capacity in the market.

The concern is that increasing “

PII costs, combined with overall regulatory costs, could result in firms exiting the market

We appreciate that it is a commercial decision for insurers to decide their risk appetite and pricing of risks, however this compulsory insurance is a significant cost to firms. Whilst basic details of a firm’s PII policy is submitted through their RMAR, what cannot be gathered from this data is insight into the scale and impact of these costs, the difficulties and pressures faced by firms to secure cover and the wider consumer implications. It is evident that increasing claims management activity on historic mortgage sales is increasing perceived risk and insurers are concerned about business that is not prime lower LTV residential first mortgage advice, as FCA has expressed concerns on markets such as second charge, later life and debt consolidation.

Fit for purpose?

With a trend towards hollowing out of policies, consumers are also not always receiving the protection from PII that was intended when the rules were written. These issues are not going away. The ‘Decile 10’ review shows that the PII market was not commercially sustainable in the years prior to 2018, and the realignment that has come out of it is not a temporary adjustment. Similarly, the changes in limits to compensation for the FOS scheme that have produced upward pressure on premiums in the financial services sector are a permanent change in the market.

Regulated financial advice remains valuable and in demand; however, it needs to be available and accessible to all consumers, not only now but as we emerge fully from the current pandemic. Coronavirus has for many consumers increased personal debt, missed mortgage and loan payments and financial circumstances have become more complex. A financial adviser or an intermediary’s knowledge of the market and ability to match a customer’s needs to a suitable product is important for the consumer to obtain an appropriate mortgage, to discuss protection needs and to secure long-term financial resilience.

Government lockdown has also impacted the self-employed and these

Please can we have another quote to placed in this area...

borrowers will need financial advice and access to specialist lenders, with many of these products only available through intermediary distribution channels. The concern is that increasing PII costs, combined with overall regulatory costs, could result in firms exiting the market, or limiting the areas of product and advice they are prepared to consider. Any reduction in the number of firms available to provide financial advice could cause unintentional consumer detriment.

Given the issues that exist within the market, a better system of pooling consumer compensation is needed, which produces less volatility, both in terms of premiums and ‘hollowing out’ of cover. This is necessary not only for the commercial health of the advice sector but also for consumers.