Is it time to revive the longstop debate?

A special feature of the consulting profession is that liability in the event of complaints is practically unlimited.

Other professions enjoy the security of a long-term bar, which limits claims for professional negligence to 15 years from the date of the negligence or loss, regardless of when the problem was discovered.

Until the creation of the Financial Ombudsman Service (FOS) in 2001, financial advice also fell within the scope of the long stop. Although the FOS rules broadly reflect the statutory time limits for professional negligence claims, they do not contain an explicit reference to the long stop, which is not recognised.

A long stop would provide financial security for advisors who are retiring. It would also align advice with other professions.

Persistent calls for the reintroduction of the long stop fell on deaf ears and the British financial regulator, the Financial Conduct Authority, excluded it entirely in 2016.

But eight years later, the world looks very different. Is it time to revive the debate?

Out of balance?

There are limitation periods for claims for damages arising from professional negligence, which are intended to protect both consumers and professionals.

There is a primary limitation period that allows those affected to file a complaint within six years of a problem occurring. This can be extended by a secondary limitation period, allowing those affected to file a complaint within three years of becoming aware of the problem, even if the primary limitation period has already expired.

The FCA has decided not to reinstate the long-term ban because it receives relatively few complaints after 15 years and does not want to allow claims relating to long-term investments to become time-barred, where problems may not emerge until years later.

If you don’t protect good advisors, how are you going to protect the public?

However, consultants such as Alan Lakey, partner at Highclere Financial Services, have objections to this.

“Parliament has said that 15 years is an appropriate period to draw the line between consumer claims and support for businesses when latent claims cause costs and damage,” he says.

Lakey, who fought tirelessly for the Long Stop, sees no difference between financial advice and electrical engineering, for example, or construction defects in buildings that are discovered decades later but are covered by the Long Stop.

“There is so much confusion, people don’t understand how it works,” he says. “The consultants have no idea.”

A long stop would make the profession more attractive for newcomers

This often becomes apparent when advisers wish to leave a network or retire, or when a complaint is received that appears to come from a claims management company.

PI Prices

One advisor, who wishes to remain anonymous, is a former Appointed Representative (AR) of Sense Network and other networks. The advisor wishes to retire but is very concerned about paying ongoing advisory liabilities through run-off coverage.

Run-off cover is a type of professional indemnity insurance that covers all liabilities of a retired or departed consultant. The lack of long-term cover could be seen as a problem in this regard, as run-off cover for consultants must run indefinitely.

However, current pricing makes it difficult for the market to offer a single premium, single-payment professional indemnity policy, so it is usually renewed annually and priced based on actual claims made.

Many companies go bankrupt because of PI costs

Sense Network previously allowed former ARs to arrange run-off cover themselves. However, following the FCA’s letter reminding lead advisory firms to arrange run-off cover for both current and former ARs, Sense wrote to its former ARs to say this was no longer permitted.

In a letter to the above-mentioned anonymous consultant, which can be viewed by Money marketingSense tells his former board member: “This leaves us with no choice but to charge you a contribution to the exit block policy.”

The consultant, who left Sense several years ago, says they signed a contract for after-liability insurance and have not had any discussions with the network about participating in a policy for departing members.

“I told them it is not my responsibility to pay the costs, it is theirs,” says the consultant.

“There is no information on how much my share of the severance pay will be, but Sense says the amount will decrease each year. Once it reaches £100, it will stop being paid.”

Transparency is the key word. If everyone knows what it is about, there should be no surprises

However, this year’s bill was the same amount as last year, and so the consultant wonders when the bills and letters, which he finds threatening, will stop.

“If I started now, I wouldn’t join a network,” they say.

Michael Couzens, chief executive of Adviser Services Holdings, which owns Sense Network, says the approach the company and many others have to take “reflects the significant inadequacies of the PI market.”

He adds: “We do not make a profit on our PI run-off book, but we try to pass on the cost of the insurance required to mitigate risk fairly to the consulting firms – provided the consulting firm has agreed to this.”

“We have never intended to appear ‘threatening’ in our correspondence, but if a consulting firm does not engage, it would be wrong of us not to clearly state the consequences.”

Couzens admits the letter limits Sense’s flexibility. He says Sense continues to have discussions with its insurers about the possibility of writing single premium policies, but the pricing is too uncertain.

Parliament said 15 years was an appropriate period to draw a line between the needs of consumers and support for businesses.

“At present, and given the FCA’s position, our only solution is to adopt a blocking policy for exiting firms,” he says.

“It is not clear to me what other practical options would be possible. But that does not mean that we will not talk to companies about the challenges and how they might cover the costs.”

Couzens agrees that these costs for his former ARs should decrease over time.

“Of course we would like to hold talks with the respective company,” he says.

No surprises

Some commentators believe that companies could manage their current liabilities better.

“Transparency is the word,” said one of them MM“If everyone knows what it’s about, there shouldn’t be any surprises.”

However, advisers are often surprised when complaints appear seemingly out of nowhere. According to ValidPath managing director Angus MacNee, the industry needs to take a closer look at its existing system, in which “clients can make complaints and the burden of proof that it is not a legitimate claim is on the authorised firm”. This is the problem, he argues.

If I started now, I wouldn’t join a network

Commentators agree that customers can be financially rewarded for unsubstantiated claims and that this has implications for PI protection. In an overview of the broader risks that PI insurers consider when setting premiums, Couzens mentions “the consequences of the lack of oversight of claims companies, which allows speculative claims to arise”. These claims, he says, “cause significant costs and uncertainty throughout the insurance and advice chain”.

The anonymous advisor mentioned earlier was upset when a complaint was received from a former client about a claims management company. The pre-written letter, which falsely referred to another consulting firm in the middle of it, was in direct contradiction to the last email the client had sent thanking the advisor for everything they had done in connection with a defined benefit transfer.

“I have done a good job for him and he knows it,” says the consultant.

However, the adviser’s previous network has offered the client compensation of £141,000, so the adviser’s professional indemnity insurance excess is now £25,000.

There is so much confusion and people don’t understand how it works. Consultants have no idea

“Many companies go bankrupt because of PI costs,” says the consultant. “But if you don’t protect good consultants, how are you going to protect the public?”

Consultants face unlimited liability and the burden of ongoing professional indemnity insurance costs. Twenty7tec managing director James Tucker believes it’s time to rethink long-term protection.

“A long-term ban would provide much-needed financial security to retiring advisors,” he says.

“This would also bring the consulting sector into line with other professions such as lawyers and experts and make the career more attractive for newcomers.”

This article appeared in the September 2024 issue of Money marketing.

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