Renewing professional indemnity insurance (PII) has been an increasingly difficult, expensive and unpleasant experience for intermediaries and the bad news is that things are unlikely to ease in the near future. The good news is that professional indemnity insurers, the Financial Services Authority (FSA) and the Association of Mortgage Intermediaries (AMI) are sitting around the same table and trying to sort out a workable solution for everyone.
The biggest worry for mortgage intermediaries is that they get bundled together with the independent financial adviser (IFA) market and are seen as a high-risk category by insurers. Forthcoming regulation is doing little to soothe insurers’ fears of the risk posed by mortgage intermediaries, and most find it difficult to see past the rash of claims and complaints they believe the new regime will bring.
Chris Cummings, director at AMI is well aware of the problem, and it is an issue that has long been on the radar for the Association of Independent Financial Advisers, AMI’s sister organisation. Cummings says: “We lobbied for a PI forum, and for the PI insurers and FSA to get together and talk through the issues facing the market. The FSA was starting from a different position of what PI is all about. PI insurers have never seen PI as being designed around customers, but as something to cover unusual events. However, the FSA seemed to be regarding it as a ready source of customer redress and that was a cultural difference. That led to the IFA market having far more claims than anyone expected. It also went hand in hand with demand exceeding supply in the PI market as a whole right across Europe. So we had a series of events which meant PI insurers were having their fingers burnt and seeing IFAs as a high-risk category just at a time when there was scarce supply. There was a compounding of problems – almost a perfect storm. The big worry of course was that mortgage intermediaries, who are a very low risk category, would get tarred with the same brush. We have been very keen to get the industries together and set out to show that mortgage intermediaries are low risk, and we have statistics to prove that. Looking at complaints history there is only a handful of complaints about mortgage advice. We are trying to find a way for the FSA and the PI insurers to look at mortgage regulation as a low risk event.”
Whether regulation raises the standards and protects consumers from mis-selling is yet to be seen, and as far as some insurers are concerned, is missing the point. Glyn Morris, underwriting director at Magian Underwriting comments: “Although the mortgage industry may be about to come under higher standards, theoretically making them better at what they do and giving customers less reason to complain, this is not always the case. The issue is whether brokers are meeting the new standards.”
The proof of the pudding will be in the eating and it will take time to see exactly how intermediaries react to the new regime. However, Morris feels the past experience of the IFA market is a good pointer – and so highlights some of the fears that Cummings has about mortgage intermediaries being sullied by the claims experience of their IFA cousins. Morris also says most of the mortgage intermediaries covered by Magian also do investment business, and that few mortgage-only intermediaries are on the books. He says this is because other underwriters in the market undercut the rates offered by Magian, perhaps suggesting its ratings for mortgage-only clients are being affected by associations with the IFA market.
Morris adds: “Once mortgage brokers are under the auspices of the FSA I think the market will become more expensive. I think regulatory standards being higher, with all due respect, to what mortgage brokers and intermediaries have been used to will cause uncertainty. Uncertainty among brokers and customers is not good. IFAs are an example, and as they have become more highly regulated there have been more claims.”
Dearth of capacity
Cummings stresses that evidence from the Mortgage Code Compliance Board shows there have only been a few cases against mortgage intermediaries relating to poor advice. As a more detailed and stringent claims history for the sector is built up under the FSA, he believes this will be indisputably borne out. All well and good but at the moment, premiums are still high, capacity is still low and the uncertainty created by the forthcoming changes looms large.
The dearth of capacity is at the very core of the problem for intermediaries and until more providers come into the market, competitive pricing is going to be difficult.
James Byrne, operations director at Jim White’s Mortgage Solutions comments: “What we really need is plenty of players in the market so there is some competition. If there are only a few providers then they can set the levels as they like, and this has happened in the financial services industry. The problem is that with all this change a lot of people tend to back off until they see everything clarified which leaves a few brave people putting their head above the parapet and being able to charge what they want and the industry suffers as a consequence.” Byrne reckons premiums have being going up this year by about 20%, citing anecdotal evidence of smaller brokers seeing their premiums rise from £550 to £650 on renewal.
For Duncan Clarke, a director at Peak Financial Management which handles both investment and mortgage business, premium rises have been closer to 100%. He says: “We have been an IFA for three years and have no historical business. We have no endowments, pension transactions or split capital investment and as an insurance risk I think we are as good as any in the market.” Put simply, Clarke believes his risk is not being assessed properly and adds: “Insurance is about assessing a risk and charging an appropriate premium.” He does not believe this is being done.
Clarke accepts there are other options available, and has considered joining a network. However, as a family business this is not the direction in which he wishes to go, and is loathe to lose his independence. Although the move may save him his PII costs, there are then the network costs to be paid. Clarke, like others, feels he would be robbing Peter to pay Paul. Byrne adds his weight to this point of view saying: “I do not think anybody knows if the networks will be cheaper to tell you the truth. Some of the figures that are coming out from those setting themselves up as principals under the FSA guidelines are rather large. It is still an unknown though.”
For the smaller operations with turnover around the £70,000 mark, Byrne says PII costs will be under £1,000. Networks such as Mortgage Intelligence have said the cost of joining will be around 10% of turnover. So if small brokers are going to get their money’s worth from a network, they have to be sure of the services they are getting on top of the PII, and see exactly how much FSA compliance will cost to do themselves.
Another option for the market is to insure itself through compulsory contributions to a central fund. Intermediaries are in favour of exploring such an option, especially if it will mean cover is available for all at a price that is more affordable than what is currently being offered by insurers. A similar model was used to provide PII to solicitors, but it was disbanded a number of years ago over fears that it could not support future claims. Cummings says such a move was talked of for the IFA market earlier in the year, but seen as too risky to support the market’s needs. As such it is unlikely something similar will be set up for mortgage intermediaries.
If insurers are being asked to reassess how to look at mortgage intermediaries, it is only right, intermediaries are themselves prepared to give ground. Traditionally the sector has been sales driven, and if premiums are to come down, insurers will have to feel there has been a priority shift towards compliance and defendable processes. Morris comments: “We look for IFAs who put compliance before anything else. IFAs are traditionally sales driven and this tends to produce more claims than if a company is compliance lead. Also if a company is compliance lead it is more likely to be able to defend a claim. The only way we are able to take comfort is if we think a firm is well equipped to defend a claim that comes through its doors.”
Although capacity constraints and high premiums will not be dealt with overnight, the involved parties have at least put their heads together in search of a solution. Whether they can resolve the matter to everyone’s satisfaction in a timely and effective manner remains to be seen.
Mortgage intermediaries are suffering from association with IFAs in terms of insurance even though they have a lower risk profile.
Mortgage intermediaries will have to become compliance – not sales lead – organisations to secure cover.
The FSA and AMI are consulting with insurers and intermediaries to find a workable solution for all.