NZI, which is understood to cover 60% of the financial advice sector, has written to the Triple A advisory group saying it will no longer cover advisory firms with less than three people.

In the letter NZI National Relationship Manager Andrew Jollands says the insurer has committed to providing professional indemnity insurance to FAPs with three or more advisers. Effectively blocking a large part of the industry from accessing PI insurance through NZI.

The letter shows a hard reversal from the insurer’s previous position on professional indemnity.

“Following our earlier advice that NZI would no longer underwrite financial adviser’s liability, we have reconsidered our position.

“As originally advised we were concerned at the significant exposure generated from multiple individual advisers’ limits of indemnity for the minimal premium generated. In addition, uncertainty surrounding the future of financial adviser claims arising from the new regulatory environment meant we could not effectively measure the future exposure.

“NZI will only insure type two adviser businesses licensed as financial advice providers (FAP), with three or more advisers. Our concern is, with the level of compliance required under the new regulations, a one or two adviser firm will not have the capacity to maintain their advice levels, their ongoing education, along with all the compliance.”

The move does not bode well for single adviser FAPs and reveals how insurers will have a huge impact on influencing the shape of the market under the new regime.

Triple A outgoing chief executive Wayne Smith says NZI's decision is "completely inconsistent" with all the consultation over the years around the new regime and totally at odds with what the FMA and MBIE have been saying.

He says advisers may end up exiting the industry or amalgamating into bigger groups, however there is no assurances that PI insurers won't change the rules later and and increase the minimum adviser firm size from three. 

Katrina Shanks, CEO of Financial Advice New Zealand has said that this move will have large repercussions across the industry. “We know that over 50% of those who applied for transitional licences are single adviser firms, and 28% have less than five advisers.”

Shanks says that the concerns about a move like this is what initially drove Financial Advice New Zealand to lobby hard against PI’s removal from the final full licensing conditions.

“We were concerned that there were indications in the marketplace that NZI were looking at reducing their cover. We wanted to make sure that financial advisers could still get a licence regardless of what was happening in the insurance marketplace.”

Although NZI retracting their cover from single advisory FAPs will feel like a huge blow to confidence for many advisers across the market, Shanks is quick to find a silver lining.

“There is opportunity for other providers to come into the marketplace now. There will be a huge gap in the market and that is exciting. We could see some really innovative products and services. This decision also allows opportunity.”

To any small financial advice firms feeling this as a squeeze Shanks says: “I believe that these companies provide an invaluable service to New Zealanders. I think that they will be here providing financial advice in the long term. They are the ones that have the trusted relationship with clients, they are the ones that will be very successful in the new environment.”

But, in the meantime Shanks believes that it is best practice for advisers to have PI insurance. Those one man bands who were previously serviced by NZI, will have to find somebody else to insure them.

Overall Shanks is positive that this move will not cause an exodus of single advisory FAPs. “I don’t think that one provider saying they will not provide PI insurance will drive financial advisers out of the sector. I think we are going to see new providers come in with new products and that is exciting for advisers.”

Good Returns has asked NZI for comment and is still awaiting a response.