Financial Adviser and IFA Insurance

In this profession, more than any other we insure, the file written at the time is the only version of events that survives.

A suitability complaint asks whether a recommendation was right for the client's circumstances, objectives, capacity for loss and risk tolerance as they were then. Ten or twenty years later, the client's memory has been shaped by everything that happened since: a market fall, a divorce, redundancy, a fund that underperformed, or simply the knowledge that a different choice would have paid more. Nobody recalls their own attitude to risk in 2014 accurately. The fact find and the suitability report do.

So the discipline is capture rather than compliance. Record circumstances properly rather than minimally, record objectives in the client's own words, record capacity for loss as a figure rather than a label, record what alternatives were considered and why they were not recommended, and explain the recommendation in language the client would recognise. Where a client insists on something against the recommendation, record the recommendation, their decision, and that the implications were explained. That last paragraph wins cases.

Placing professional indemnity for an advice firm is unlike placing it for any other profession, and understanding why saves a great deal of trouble.

Insurers have taken very large losses on particular advice types, defined benefit pension transfers above all, and the response has been to restrict rather than reprice. The restrictions take several forms and any of them can sit behind an acceptable looking premium: an outright exclusion of DB transfer advice, an exclusion that applies to historic advice as well as new, a sub-limit far below the main limit, an aggregate limit shared across all such claims, and exclusions for unregulated investments or introductions. Firms with past DB business face a market that may simply not want it.

So the position has to be read precisely rather than summarised. Which advice types are excluded, whether the exclusion reaches work already done, whether it is an exclusion or a sub-limit, and whether the limit is each and every claim or aggregate. A firm with historic DB transfer business and a policy excluding it is uninsured for its most likely claim. And because the ombudsman can reach back a long way, that is not a theoretical gap.

A large part of this profession operates as appointed representatives of networks, and the liability question that follows is more complicated than most advisers assume.

Where a firm is an appointed representative, the principal carries regulatory responsibility for its advice. That sounds like protection, and in a sense it is: the network's arrangements stand behind the advice and the network sets the compliance framework. But the adviser firm is not insulated. Networks have their own professional indemnity with their own exclusions and excesses, the network may seek recovery from the firm under the agreement between them, and if a network itself fails, the advisers who operated under it discover what their own position actually was. Firms also move between networks and to direct authorisation, and past advice does not move with them automatically.

So the practical work is reading the agreement rather than relying on the relationship. Establish what the network's cover does and does not include, what excess the firm bears per claim, whether the network can recover from the firm and on what basis, what happens to liability for past advice if the firm leaves, and whether the firm needs its own cover alongside. An adviser leaving a network for direct authorisation needs that handled deliberately, because the gap it can create is the same claims made gap that catches every profession, with a longer tail than most.

There is an exposure here that has nothing to do with the original recommendation and a great deal to do with everything after it.

Most advice firms charge an ongoing fee for servicing a client: a percentage of funds under advice, taken annually, in return for review, rebalancing and continuing suitability. The obligation that creates is to deliver the service that was paid for. Where annual reviews were not carried out, or were a statement in the post rather than a review, or where a client's circumstances changed materially and nothing happened, the firm has taken fees for a service it did not provide. That is both a redress question and a regulatory one, and because the fees were taken year after year the amount accumulates quietly across an entire client bank rather than arising on one case.

So the discipline is evidencing delivery rather than intending it. A record per client of what was reviewed and when, what changed, what was recommended as a result and that the client was contacted, plus a realistic view of how many clients a firm can genuinely service at the fee it charges. Firms that have grown a client bank faster than their capacity to review it are carrying an exposure across every one of those relationships. It is also worth checking how your policy treats a redress exercise affecting many clients at once rather than a single complaint.

One set of exclusions decides this placement. We are an FCA regulated broker and will not tell you we are the best choice. These are the questions that decide it.