While many people in the industry, including the FMA, were surprised by NZI’s shock move to not offer professional indemnity cover to FAPs with under three advisers, there were a few people who saw the move coming a mile away. 

One of these people was Steven Burgess, director of the Compliance Refinery. Burgess says that PI has been an area of scrutiny for insurers.

“In talking to PI providers, they have been telling us that the market is just changing, there just isn’t any appetite for PI any longer.”

Burgess believes that rising risk is causing many providers to consider exiting sections of the market, not just NZI whose announcement last week shook the industry. 

“It’s my understanding that it's just not palatable to take on the level of risk that PI requires. It’s a sector of the market where risk is going up exponentially for those that insure.”

Although rising risk is an issue affecting the entire market in this period of global uncertainty, Burgess says that financial services are feeling the particular brunt of the levels of fines that face those in the industry who get something wrong.

Burgess says that advisers need to make sure they understand the complexity of the new regime.

“The thing is nobody goes out and purposefully writes bad business. It also could be down to luck, you could have an unmeritorious complaint that cost you $25,000. Advisers need to be thinking, ‘Can you float that kind of money?’ ‘Can your business sustain that?’ and ‘Can you manage that stress?’.

“The biggest thing that PI offers an adviser is that they [the insurer] defend the claim so that you don’t have to. We live in an environment when all small business costs are going up. I think we tend to forget that advisers are businesses, even the smaller FAPs. So they have to assess their risks and determine if it is worthwhile.”

While many are concerned about the direction that the industry is heading in, Burgess wants to remind people that there is more to the shape of the industry than the regulator. “The regulators have made a space for small businesses to operate, but there are other things at play here that are going to determine how those businesses operate.

“All industries are impacted by key counterparties. Take a manufacturing company for example, they have huge constraints based on their supplier. This situation is no different than that.

“You have suppliers that are businesses that have to make risk decisions based on what is best for them. The industry's job is to react, and to come up with viable business structures and profit models that the regulator puts in place.”

In terms of the industry’s reaction, Burgess is hopeful that smaller FAPs will find a way forward from this.

“The industry is going to come up with solutions here, it always does. Advisers will decide if they want to be advisers or if they want to run businesses, and go and find homes if they don’t want to do both. I think the industry is going to be fine.”

Burgess even believes that there is a clear path forward for advisers to retain PI insurance under the new regime.

“We suggested that the government start up a fund to guarantee remediation of clients in financial services. Advisers would pay into that fund and settlements would come out of that. This is relatively common, we have seen this system be quite successful in Canada.”