A quirk of the advice profession is that, when it comes to complaints, liability is effectively unlimited.

Other professions enjoy the certainty of the longstop that limits professional-negligence claims to 15 years from the date of the negligence or loss, regardless of when the problem is observed.

Financial advice also fell within the scope of the longstop until the Financial Ombudsman Service (FOS) was set up in 2001. Although the FOS rules broadly reflect the legal time limits for professional-negligence claims, they contain no explicit reference to the longstop, which is not recognised.

A longstop would provide financial security for retiring advisers. It would also align advice with other professions

Persistent calls for the longstop to be reinstated have fallen on deaf ears and, in 2016, the Financial Conduct Authority ruled it out completely.

But the world is a very different place eight years on. Is it time to revive the debate?

Out of kilter?

Time limits for professional-negligence claims exist to protect both consumers and professionals.

There is a primary limitation period giving people the facility to complain within six years of a problem’s occurrence. This can be extended by a secondary limitation period, allowing people to complain within three years of becoming aware of a problem, even if the primary limitation period has expired.

The FCA decided not to reinstate the longstop because relatively few complaints are made after 15 years and it did not want to time bar claims relating to long-term investments, where problems may become apparent only years down the line.

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

However, advisers such as Highclere Financial Services partner Alan Lakey take issue with this.

“Parliament said 15 years was a suitable period to draw a line between the requirements of the consumer and support for businesses, where latent claims cause cost and damage,” he says.

Lakey, who campaigned tirelessly for the longstop, sees no difference between financial advice and electrical engineering, for example, or design faults in buildings that are discovered decades later but are covered by the longstop.

“There is so much confusion, with people not understanding how it works,” he says. “Advisers don’t have a clue.”

A longstop would make the career more attractive to new entrants

That often becomes apparent when advisers want to leave a network or retire; or a complaint comes in that looks like the work of a claims management company.

PI pricing

One adviser, who wishes to remain anonymous, is a former appointed representative (AR) of Sense Network and other networks. The adviser is looking to retire, but paying for ongoing advice liabilities through run-off cover is a big concern.

Run-off cover is a type of professional indemnity (PI) insurance that covers any liabilities of a retired adviser or an adviser who has left the business. The lack of a longstop could be seen as a problem in this respect because run-off cover needs to run indefinitely for advisers.

But current pricing issues mean it is challenging for the market to provide single-premium, ‘once and done’ PI cover, so it is usually renewed annually and priced on a ‘claims made’ basis.

A lot of companies go out of business because of the PI costs

Sense Network previously allowed former ARs to organise run-off cover themselves. But, following the FCA’s Dear CEO letter that reminded principal advice firms to hold PI cover for both current and former ARs, Sense wrote to its former ARs to say it could no longer allow this.

In a letter to the anonymous adviser referred to above, seen by Money Marketing, Sense tells its former AR: “This leaves us no choice but to invoice you for a contribution to the leavers’ block policy.”

The adviser, who left Sense several years ago, says they signed a contract for run-off cover and had no discussion with the network about contributing to a leavers’ policy.

“I’ve told them it’s not my responsibility to pay; it’s theirs,” says the adviser.

“There is no indication of what my share of the leavers’ policy is, but Sense says the amount will go down each year. When it gets to £100, it won’t chase it.”

Transparency is the word. If everyone knows what the deal is, there should be no surprises

However, this year’s invoice was for the same amount as last year’s, so the adviser wonders when the invoices and letters — which they deem threatening — will stop.

“If I was starting out now, I would not join a network,” they say.

Michael Couzens, chief executive of Sense Network’s owner, Adviser Services Holdings, says the approach that it and many others have to take “reflects the significant imperfections of the PI market”.

He adds: “We do not make a profit out of our PI run-off book, but we try to fairly pass on to adviser firms the costs of insurance needed to mitigate the risk — where the adviser firm agreed to this.

“We have never set out to be ‘threatening’ in our correspondence but, when an adviser firm does not engage, it would be wrong of us not to be clear on the consequences.”

Acknowledging that the Dear CEO letter restricts its flexibility, Couzens says Sense is continuing discussions with its insurers about the possibility of arranging single-premium run-off policies, but the pricing is too uncertain.

Parliament said 15 years was a suitable period to draw a line between the requirements of the consumer and support for businesses

“At present, and in light of the FCA’s position, our only solution is to arrange a block policy for departed firms,” he says.

“I am unclear on what other practical options would be possible. This does not mean we will not talk with firms about the challenges and how they might cover the cost.”

Couzens agrees that these costs should fall over time for its former ARs.

“We would, of course, be pleased to talk with the firm concerned,” he says.

No surprises

Some commentators believe that ongoing liabilities could be handled better by firms.

“Transparency is the word,” one of them told MM. “If everyone knows what the deal is, there should be no surprises.”

However, advisers are often surprised when complaints materialise seemingly out of nowhere. According to ValidPath managing director Angus MacNee, the industry needs to look more closely at the system it has, where “customers can make complaints and the burden of demonstrating that this is not a valid claim falls on the authorising firm”. This, he argues, is the problem.

If I was starting out now, I would not join a network

Frustration at how clients can be financially rewarded for making spurious claims, and at the impact this has on PI cover, unites commentators. In a rundown of the wider risks that PI insurers take into account when setting premiums, Couzens mentions “the consequences of the lack of supervision of claims-handler firms, which allows the creation of speculative claims”. These claims, he says, “create significant cost and uncertainty throughout the insurance and advisory chain”.

The previously mentioned anonymous adviser was upset when a complaint came from a former client through a claims management company. The templated letter, which mistakenly referenced another advice firm halfway through, was in direct contrast to the last email the client had sent, thanking the adviser for everything they had done in relation to a defined benefit transfer.

“I did a good job for him, and he knows it,” says the adviser.

However, the adviser’s former network has offered the client redress of £141,000 — and the excess on the adviser’s PI cover now stands at £25,000 as a result.

There is so much confusion, with people not understanding how it works. Advisers don’t have a clue

“A lot of companies go out of business because of the PI costs,” says the adviser. “But if you don’t protect good advisers, how are you going to protect the public?”

With advisers facing indefinite liability and the burden of ongoing PI insurance costs, Twenty7tec chief executive James Tucker thinks it is time to revisit the longstop.

“A longstop would provide much-needed financial security for retiring advisers,” he says.

“It would also align the advice sector with other professions, such as solicitors and surveyors, and make the career more attractive to new entrants.”

This article featured in the September 2024 edition of Money Marketing. 

If you would like to subscribe to the monthly magazine, please click here.