Some professional indemnity insurers are charging higher premiums for structured products or are refusing to cover them. This makes it difficult for IFAs to offer them to their clients Some professional indemnity (PI) insurers in the UK are charging higher premiums or refusing to cover structured products, which they consider to be risky investments, which is causing problems for independent financial advisers (IFAs) and hindering their efforts to comply with theFSA’s 2012 Retail Distribution Review (RDR). “[The problem] first came to the fore around 2003 after the precipice bond issue,” says Ian Lowes, managing director of Lowes Financial Management, a Newcastle-based IFA. “Some IFAs were selling contracts which may not have been suitable for investors, so PI Insurers started to shy away from structured products.” The insurance is required by the Financial Services Authority (FSA) and the European Union for all professionals selling knowledge or skills, and covers them against claims for loss or damages by a client or a third party. Although the problem stems back to the late 1990s and early 2000s, when investors lost money on the accelerated downside of precipice bonds, the collapse of Lehman Brothers in 2008 revived concerns about the potential pitfalls of structured products. With the RDR coming into effect in 2012, IFAs will be expected to offer all investments, including structured products. “I don’t know how PI insurers can exclude them if the FSA have made it clear that IFAs have to advise on them,” says Lowes. “How can you be independent if your PI insurance stops you from being so?” One of the reasons why some PI Insurers are reluctant to cover the products is that they do not fully understand them, according to Gary Dale. “The feedback I’m getting from IFAs is that some PI firms don’t understand the difference between structured investments and structured deposits, and some label them all as structured products,” says Gary Dale, head of intermediary sales, derivatives and structured products at Investec in London. “IFAs’ PI cover is affected by this confusion, which may have an impact on whether the firm decides to sell structured investments at all.” The RDR will not apply to structured deposits, while the Financial Services Compensation Scheme applies to deposits but not to investment products in the event of issuer default. One structure designer at a structured products consultancy says PI claims for structured products have in fact decreased, so premiums should not be going up. More education is needed to solve the problem, says Dale. “I think banks should hold the responsibility for providing education, but we can’t force the information down PI insurers’ throats. If an IFA only wants to sell structured deposits up to the £50,000 FSCS limit, why should that affect PI insurance. If they sell over £50,000, the PI excess should only cover above this level. “As we lead up to the RDR, I hope the various pressure and lobby groups of the FSA start to speak to the PI insurers and tell them they will have to understand this.” However, others in the industry say the issue is merely an excuse used by IFAs who do not want to sell structured products....
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