A Smaller Slice of Pie 

I've been writing a book on regulation over the last three years.  It's one of those background projects to which I devote a portion of what I euphemistically call my 'spare time'.  In a life which has, for the last seventeen years, been largely swallowed up by the rapacious demands of the UK's system of regulation, 'spare time' isn't something that one encounters lying around in generous dollops, just for the taking.  Indeed, every time one feels one has earned a little time off for good behaviour, the FCA does something else.

There might be some who think that the topic of 'regulation' has relatively little general appeal.  I beg to differ.  The subject draws in the nature of collective delusions, the philosophically shaky presuppositions of the 18th Century Enlightenment, the history of the EU, and the very validity of capitalism.  In short, there's something for everyone in this theme.

Hence, the book-writing, other than clearly being a kind of vanity project, is also rather a slow burn.  The issues which were current when I began the exercise (2017) are now so passé.  Indeed, the kinds of things which were looming on the horizon three years back, but which seemed unlikely due to their inherent ridiculousness, are now becoming reality.  It is as if real life has actually caught up with satire - perhaps the regulators have in mind the demise of the comedian as much as the financial intermediation sector.  As I describe it in my (yet to be published!) book, regulation has always felt like a car-crash in slow motion, but suddenly things have speeded up substantially.

IFAs and financial planners, as a community, have always exhibited certain characteristics.  One of those is a fierce commitment to independence, born out of our sense of the elevated status of the customer, as always deserving the best possible financial outcomes.  I appreciate that there have been certain kinds of Adviser who, in the past, were content to talk the talk, but were very far from walking the walk.  However, real independence requires a moral commitment from the adviser, something which, in today's marketplace seems to be an increasingly rare commodity.  Another characteristic has been a kind of ingrained flexibility - we have learned the art of continuing adaptation, even when the latest regulatory novelties seem both unworldly and unworkable.  And, again, that flexibility is driven by our unwavering commitment to the needs of the client.  No ardent businessman or businesswoman would put themselves through this endless cycle of reinvention if they were not motivated by a passion for their customers' best interests.  From my own perspective, what keeps me in this job is the conviction that IFAs are uniquely placed to transform their client's financial future - beyond any other source of guidance.

And, I suspect that, in the present environment for intermediaries, those kinds of characteristics will continue to serve us well. Although this time around, I think we will need something more, because the FCA has finally managed to come up with the ultimate subversion of the intermediation model, through its mismanagement of the regulation and polices impacting the PII market.  If you are a reader of the financial press, you can hardly fail to have been aware of this new crisis, one which is wholly manufactured at a regulatory level - you can read about it here, here, hereherehere and here

Currently, the intermediary marketplace is full of people hollering very loudly indeed - and for good reason.  Everything about this crisis is entirely foreseeable - and therefore could have been avoided.  Here at ValidPath we have been commenting on these phenomena for quite some time, but right now we are wholly focused on building a Better Way.  Our Members will be receiving a briefing on this strategy in the very near future, but in the meantime, enjoy this extract from my forthcoming book!

Having a strong and viable PII marketplace is in everyone’s interests. PII is the insurance of last resort and is there to help intermediaries in those moments of extremis, when, through some aspect of advisory negligence, the customer finds themselves experiencing a degree of financial detriment, which the normal circumstances of life might not justify11. To be fair, there have been some inept, or unscrupulous advisory firms out there, so one can argue that this kind of insurance performs a vital function. PII is not a replacement for having good systems and controls in place, indeed it functions as one part of those provisions. More to the point, it is mandated by the FCA, and regulated firms are unable to operate without it (or without a comparable guarantee, which in many cases is unlikely to be a practical solution).

The mere fact that PII is mandated means that we are already looking at a form of insurance which may not operate entirely on the basis of the usual market forces of supply and demand. Pricing, and indeed the basic availability of the cover, is therefore inherently dependent upon the way in which the FCA operates. If the FCA managed its public communications and regulatory edicts in a responsible way, that additional kind of risk might be tolerable. Unfortunately, that’s not at all the case.

Early in 2019, there were rumours that the FCA was about to approve a significant uplift in the compensation limits awardable by the FOS. Most practitioners felt that such an action would be so irresponsible that the rumour could not possibly be true - unfortunately, the PII market, already bruised beyond recognition by the FCA’s tactics, recognised that this act of vandalism was all-too possible. And, so it proved to be the case: later in the year, there came the public announcement, and those of us at the sharp end shuddered, for we knew exactly what this would mean.

The point is this: the regulator took this step without having consulted at all with the PII market-makers. If they had consulted, the outcome might have been completely different. However, over this period, we saw a whole series of PII Underwriters leaving the market in swift succession - it turns out that, over the last 10-15 years, insurance payouts have been averaging around 180% of premiums charged, and there’s no market that can sustain that kind of haemorrhaging for more than a couple of years. Not, of course, that the FCA was even remotely interested.

Later in 2019, just to spice things up a bit, the FCA announced that it was planning to mount legal challenges against PII insurers that had introduced exclusions into their policies, exclusions which were necessary self-protections due to previous ill-considered regulatory innovations by the FCA. Another bunch of the main players quietly decided to exit the market at the end of the year, just when intermediary firms’ PII was up for renewal.

Foreseeable? You bet! And early in January 2020, when the FCA sent out its latest ‘Dear CEO’ letter, the inevitable ripples ran through the PII marketplace. Those few players left in the market battened down the hatches and determined that they were interested in underwriting intermediaries only on the most cautious (read ‘expensive’) terms imaginable. In early 2020, countless intermediary firms, well-managed and responsible in their practices, and without any significant claims record, are finding themselves unable to obtain cover on terms that might be deemed even remotely commercial. This is therefore not a problem which is the result of some kind of deficiency within advisory models. This is a manufactured, systemic problem.

It is worth exploring this phenomenon just a little further. Behind the collapse of the PII market lies a combination of toxic forces, which seem to be working together, as allies. One is the deeply dysfunctional nature of the FCA’s operations, on the ground, and the other is the tactics employed by the FOS in order to facilitate redress. It is not unreasonable to conclude that the sheer extent of the damage cannot solely be due to the FCA’s inappropriate communications strategy - and, sure enough, if you were to speak to the PII broking and underwriting community, they’d tell you the same thing. Their own experience of payouts, and the justifications for those claims, confirms a very settled pattern - a mushrooming culture of claims being rubber-stamped, where the narrative bears no relation to any kind of documented reality.

Spookily, that has been our own experience, and it had not occurred to me, until recently, that this phenomenon of ‘Living in the Twilight Zone’ might actually be very widespread. I have spoken to specialists in this field who have confirmed that the FOS has been enforcing the payment of redress in contexts where there is actually no evidence of any advice having been given by the intermediary firm. As the impartial reader will understand, that kind of risk is not something which you can factor into the pricing of an insurance policy, where the actual data pertaining to the potential liability is a prerequisite. The approach taken by the FOS assumes that no data is relevant, because, in practice, ideology is trumping all other considerations.

You cannot price ideology into a contract of insurance - or, if you did, the premium would equal the cost of claims.

So, here we are. The market is not merely unsustainable, it is now in a state of meltdown. One could describe this as a ‘car-crash in slow motion’, as the sequence of events have been playing out over the last decade or so, whilst the FCA has concentrated on its vanity pieces. But actually, the pace of action has now suddenly ratcheted up as the whole thing heads for the cliff. It might still be possible to save the day, but the FCA is in a state of denial. On the 5th February 2020, Debbie Gupta, the FCA’s director of life insurance and financial advice supervision, had the hubris to tell conference delegates that a good client fact find would make it easier for advisers to renew their PII cover. Setting aside the obvious point that this betrays a total ignorance of the approach taken by PII underwriters (and evidencing a kind of fantasy world, rather than a grip on reality), this does seem to be quite a deliberate attempt to suggest that if intermediaries are struggling to obtain cover, then it’s all their own fault, and nothing to do with the FCA. Of course, in my experience, nothing could be further from the truth.


Kevin Moss, 12/02/2020