PI renewals and the need to review DIM agreements

Professional Indemnity (PI) insurance can be a significant expense to any business. For financial advisers it can carry particularly high premiums due to the regulatory nature of the industry.

An article in last week’s Professional Adviser offered some useful guidance on how to approach PI renewals and it highlights that this is not something that should be done in a rush. If you are not absolutely clear on your business model you are likely to mis-represent your position to your insurers.

An essential issue that advisers should check before attempting to renew their PI cover relates to the topic I covered in a recent blog: Agent as Client (AAC).

PI providers are starting to ask specific questions about agreements advisers have in place with investment providers and whether this ties in with the agreements the adviser has with their clients.

For advisers who have fully reviewed their agreements and understand the risks that are in their business from those agreements, this is nothing to worry about.

For advisers who are relying on agreements that have not been reviewed recently and who may be making assumptions about those agreements, now is the time to act.

Speaking with advisers, what’s clear is that there is a significant number who are operating under agreements that were drawn up years ago…and many of those agreements are based on AAC.

Before attempting a PI renewal, advisers – particularly those without discretionary powers – should take some time to review the agreements they have in place.

Key things to review include:

AAC: the adviser and discretionary investment manager (DIM)

  • How aware is the adviser that they are acting as the client, rather than for the client?
  • How aware is the DIM that acting as the client is what the adviser has prepared for?
  • How has this awareness been established?
  • How aware is the adviser that acting as the client means the DIM can treat them as a professional investor?
  • Does the adviser have a good understanding of what they are required to do when acting as the client and the potential consequences?

AAC: the adviser and clients

  • Does the adviser have the appropriate authority from their clients to appoint a DIM?
  • Do they have agreements in place with clients that gives them this authority?
  • Has the adviser explained they will be acting as a professional client?
  • Has the adviser explained all of the consequences of this to their clients?
  • Have they outlined the complaints procedure and explained to clients that, under AAC, the adviser is removing them from the Financial Ombudsman standard compensation scheme?
  • Is this clearly documented in the adviser’s client agreement?

Advisers who have signed an Agent as Client agreement are exposed to any complaints from their clients about their investments and this may extend way into the future.

The investment manager is only accountable to the adviser, who, as a professional client, should be aware of what investments are being made and the subsequent risks attached to them.

If you are an adviser without discretionary permissions and you operate with DIMs under Agent as Client agreements, there is a good chance you and your firm are at serious risk of being hit with compensation claims should something happen to make your clients question the investments in their model portfolio.

If you apply for PI without first reviewing your situation and rely on trusting to luck then rest assured, should something go wrong and a claim is made against you, your PI insurer will be all over this and, guess what, you will discover you were not covered in the way you thought. It’s that serious.

The Personal Finance Society paper, Agent as Client, What you Need to Know is essential reading for any adviser who hasn’t recently reviewed agreements with DIMs. Reading it and acting on its recommendations will give advisers the peace of mind that their PI cover is fit for purpose. We are led to believe some PI renewals are asking the adviser to confirm they have read and understood this document… you have been warned!