FMA: Advisers without PI should 'take the bull by the horns'
NZI surprises FMA with removal of PI cover for small advisory firms but says it is not the end of the line for these advisers.
Thursday, December 10th 2020, 6:00AM 
14 Comments
by Daniel Smith
FMA director of market engagement, John Botica, told Good Returns that although NZI is refusing to provide PI insurance to small FAPs comes as a surprise, he does not believe it is the end of the line for these advisers.
“To be honest it was a surprise. As part of our consultation period around PI insurance we spoke to a lot of the brokers and they did tell us at that point that they would continue providing cover for advisers. To then turn around and come to market with this is a change that I didn’t expect.”
Botica told Good Returns that although the announcement was surprising he does not see it as heralding the doom of the single adviser FAP.
“Well run businesses that understand the psyche of their clients should not have any great levels of fear from these changes. There are no hurdles here that can’t be overcome.”
Botica says that those advisers who see the move from NZI as a blow to their confidence need to learn to “back themselves”.
“They need to back themselves that they have good businesses, good processes, great clients that can see the benefits of financial advice. The fact that one underwriter has reassessed risk within the market shouldn’t impact the way that FAPs consider themselves.”
Although there has been a lot of fear in the industry around operating without PI, Botica says that under the previous regulations PI claims have not been a huge issue.
“In the past 10 years there have not been a significant number of PI claims. From what I can find out from most of those cases, advisers were actually able to pay out those claims themselves. So you didn’t really get many situations in which an advice business was not able to stand behind itself.”
Botica thinks that under the new regime we may see PI cover shrink further in importance.
“I feel very confident that the new regime has quite a few things built in to protect consumers. Reliance on PI cover in itself is minor in comparison to the other protections and benefits there are across financial advice.”
On whether this is an instance of an insurer having undue influence over the shape of the market, Botica says, “I don’t see this as being a dramatic change in the shape of the market. I don’t see an exodus of movement of advisers from this.”
But as some advisers are concerned that a lack of PI cover will have an impact on the distribution agreements with their product providers, Botica says that they need to “look at the commerciality of that relationship”.
“There are a very large percentage of product sales that occur through advice. I would be very surprised if this caused those product providers making such material changes in the way that they distributed their products, the way that they engage with their customers. All of this needs to be thought through more calmly, it will sort itself out.”
Botica credits the situation sorting itself out to New Zealand’s natural proclivities towards small business meaning that there will always be a seat at the table for smaller FAPs.
“New Zealand is a country with a lot of small businesses. This is a key part of the psyche of how Kiwis do things. Advice isn’t any different to that and it will continue to be a part of this network of small businesses across the country.”
Regarding moving forward in these uncertain times, Botica believes that the advisers behind these smaller FAPs are smart enough to think their way through it.
“I encourage advisers to think quite widely. Think about who you are, how your businesses connect with your clients.
“When it comes down to it PI cover is only one factor of your business. They should be talking to their product providers that they engage with about what this means.
“Take the bull by the horns.”
Any small FAP not already planning to tangle with a bull in the new regime has certainly been made a matador by this move from NZI.
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However, there always seems to be an imbalance between claims against advisers(anecdotal evidence admittedly)and the ever increasing compliance requirements. And now of course the move by NZI.
I can only assume New Zealand advisers are paying for the outcome of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia.
Cheers cobber.
Then the rest of the comments. These people are dictating the rules
Think about driving for instance wouldn't we have far less crashes if there was just a lot less driving. Did you see the road toll during the lock down.
At some point we would all love to believe in fairy tales but reality is always tapping away at the door. The source of drive for all this change sometimes gives me an almost weary feeling.
1. does PI make commercial sense to the practitioner? (for some it certainly does, and for some not so much...in fact for some it never has been commercially sensible but a cost impost)
2. is it required to meet a contractual obligation with an institution?
Leaving aside the first question as that is an individual commercial risk management decision for each practitioner, it is really only the second question which is an "industry concern". In this respect I agree entirely with John, who ever so diplomatically has said "calm the F&*# down people...work through this".
From my many many conversations on this topic with institutional management over many many years it is apparent to me that largely they have operated from the same misunderstanding that MBIE did in the initial drafting of proposed conditions.
That is; PI provides some form of protection to consumers.
Bollocks.
PI pays for legal defence costs for the insured - the practitioner. It specifically does NOT pay compensation, restitution or provide financial rememdies to consumers. Now it is true that in managing professional indemnity claims an insurer may decide to offer a client some money to make a problem go away, but that is as a result of the insurer making a commercial decision to settle as a cheaper option than continuing with legal proceedings. That is the only way consumers obtain financial redress from a PI policy though.
We can test the efficacy of this noble intent by asking the PI insurers to provide a simple data set of how many claims have been made in just the last decade and how many of those claims have resulted in consumer compensation payments - not litigation settlements mind you, but actual compensation payments provided by insurers without a judicial or complaints process mandating they pay damages or costs.
I bet the answer will be nothing. And it will be "nothing" because the contracts do not exist to deliver that outcome.
So, we have a contract issue within the industry where virtually all institutional distribution agreements insist on the adviser having PI which presents a problem if, as would appear to be occuring, one of the handful of incumbents has decided to withdraw from part of the market and therefore making PI possibly unobtainable for some.
Key word: "possibly". As John alluded...let the commercial general brokers have a bit of time to work through this with insurers and let's see whether other parties step up to the plate. After all, I believe the NZ PI claims experience versus premium collection will show that it can indeed be a profitable line of business here, as opposed to overseas jurisdictions which are structurally and culturally substantially different.
Distributions issue for now is managing the contractual requirement mandated by institutions.
To be blunt, they have a PI requirement because
* every other institution has the requirement so perhaps they should too, right?
* it provides consumer protection, doesn't it?
* it's always been in the agreement and nobody objected so it should stay, right?
(believe it or not I've had an institutional in-house lawyer throw that last line at me as a reason for contractual terms).
The solution to this "issue" is to simply remove it as amnadated requirement of distribution agreements. That move is well overdue, particularly in light of the structural reform of the industry which is making a nonsense of the contractual terms anyway.
One simple example at the other end of the scale should highlight this. In the new world NZFSG is going to have something north of a thousand advisers apparently, operating under a single FAP licence. Their distribution agreements hae the same terms as mine, which efectively say (usually) that each advise must have a million in PI cover. Somebody do the maths for me...what is 1,000 x $1,000,000 ? 9 zeroes is a big number. Is it possible to obtain that level of PI cover? Or will the institutions allow a watered down umbrella policy which is capped at say 100 million, or perhaps 10 million....or does a large FAP still only have to have the same level of cover as the single adviser business? And whatever the level of cover under that umbrella policy, doesn't it become a "first in, best dressed" policy, where the initial claimants are fullly covered but later claimants are perhaps uncovered?
I'd suggest that is probably a bigger problem for institutions and PI insurers to manage than 1-2,000 single adviser FAP's with zero PI claims in their decades of practice.
THESE are the issues institutions should be working through, and why it is time to simply remove the requirement entirely from their agreements.
Just like the regulators did.
I spoke to a major insurer yesterday and they absolutely will require advisers to continue to have PI cover to hold an agency agreement with them. And why wouldn't they??? I have no doubt that the banks will also be wanting mortgage advisers to continue to have PI cover to hold accreditation.
The question we all need to be asking now is why PI cover wasn't one of the many licensing conditions required by the FMA to hold a full licence going forward? I mean seriously of all the things that could have been excluded they didn’t include PI cover as a requirement to continue providing advice to customers? What was the thought process behind this decision? Did the FMA, MBIE or whatever Government agency we are dealing with today even both consulting with the many providers in the market?
This process is turning into a farce now and like the Matron says this is totally unacceptable from a Government body.
I do not believe the conclusion in the following paragaph is true:
PI pays for legal defence costs for the insured - the practitioner. It specifically does NOT pay compensation, restitution or provide financial rememdies to consumers. Now it is true that in managing professional indemnity claims an insurer may decide to offer a client some money to make a problem go away, but that is as a result of the insurer making a commercial decision to settle as a cheaper option than continuing with legal proceedings. That is the only way consumers obtain financial redress from a PI policy though.
My understanding is that if a client suit against an adviser continues to trial, and the client is awarded a $$$$ judgment, the PI insurer will pay the insured (who can then pay the client) up to the policy limit.
The reasons cases settle include to avoid further cost, to settle as an economic bargain as opposed to being subject to a judicial decision, or to keep any payout secret.
We are probably just splitting hairs a little, and looking at it from slightly different directions.
You are correct, but the over-arching point that I make about it being "defence costs" is correct too I believe. Looking to the wording of one of the main PI contracts in the market it is made clear that a "valid claim" does include costs arising from civil liability as a result of a judgement.
I interpret this to mean that a consumer can get a judgement which includes more than just costs in a civil suit or a DRS process, subject to excess and sum insured maximums of the policy.
However, that means an action has to be initiated by the consumer and taken to its conclusion (being a judgement) before there is any possibility of that consumer redress. That is a result of the policy responding as a "defence costs" insurance contract; not a consumer protection scheme.
Your final point regarding settlements is 100% spot on.
I believe PI cover to be a useful commercial risk management tool for the majority of practitioners - provided the policy does indeed cover what the adviser expects and the premium is fair and relative to the risks. I would recommend it for the majority of practitioners (though not necessarily all).
Therefore I do not argue against the merits of an adviser having PI cover any more than I argue against them having Statutory Liability cover, or D&O cover, or Keyperson cover (as examples).
I simply do not believe it has a place featuring as a condition of agency contracts as it should be a commercial decision made by the insured (who it is there to provide protection for) as is the case with every other form of insurance.
A natural part of that protection/defence is to repel or reduce the client's claims. I don't understand how me having access to strong defence is meant to be (so much the) better for the consumer (as to warrant it being required of me in the first place).
In other words, TV is right - it has no place as a requirement in agency agreements. They do not deserve such standing as being "required".
Especially given how fickle the providers can be at both u/w and claim. I suggested that the FMA and MBIE would be abdicating their duties as regulators by using PI as a quasi gatekeeper.
They have moved away from that.
Question is, is this what providers have been doing all along? With the added convenience of me (paying for!) having a good defence also protecting the providers I am associated with!!!
However, the FMCA and the Code of Conduct places the liability fairly and squarely on the Adviser whichever way you look at it (Nom Reps excepted), so why the insistence on PI in the Agency Agreement?
Indeed, why are Agency Ageements still necessary when there is legislation and regulation specifically covering intermediary conduct and practices?
The disbursement or recovery of the financial aspects could simply be covered by a letter between the parties.
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Where to start? It only goes to either evidence a complete lack of understanding of the sole Adviser market, or at best a naive view that 'she'll be right'.
Saying Advisers should just "back themselves" when dealing with suppliers by looking "at the commerciality of that relationship” is backing Advisers into a corner.
Telling Advisers to "Take the bull by the horns.” is insulting and not acceptable from a government body.
Really, what do you expect is going to happen now?