Insurers issue IFA warning

City lawyers and professional indemnity (PI) insurers warn that many independent financial advisers (IFAs) could face liquidation as a result of the potentially huge claims resulting from the mis-selling of personal pensions.

The most immediate concern for IFAs is whether they will be able to cover potential losses on their PI insurance policies.

The signs are that their worst fears may be realised, as many IFAs trying to renew their cover are reportedly finding.

One City lawyer acting for IFAs and life companies says: “There is a risk that this could wipe out a considerable section of the financial services industry. We are already seeing the limit of PI insurance for IFAs is exhausted, and they will have to find the money themselves.”

The lawyer, who does not want to be identified, adds: “Assuming the Government doesn't want to see a string of life companies going under, it will have to do something.”

The crisis for the financial services industry stems from negligent advice given to a large number of people since 1988. From that time, around 7.8 million policies were sold and around one million are thought to be faulty.

Tony Howe, manager of PI mutual company LIBM, which specialises in the IFA market, says IFA insurers face a potential u200 million bill for compensation. The PI market has a total income of only u10 million, reduced to as little as u6 to u7 million after expenses.

With around 1,000 claims already in the pipeline, some of the seven or eight main insurers are indicating they will cease underwriting IFAs and refuse to renew policies. Those still renewing are seeking higher premiums and excesses for much lower cover, he warns.

“Those IFAs without regulatory cover will be in breach of regulatory requirements. These people don't have a huge amount of solvency in their businesses, and so will have to go into liquidation,” he says.

Howe's warnings came the day before the High Court decided whether to give leave to the LIBM and the IFA Association to apply for judicial review of the Securities and Investments Board's demand that IFAs and life companies “trawl” their files for possible faulty policies.