26th July 2012

PI- Apocalypse ahead?

Hi Derek

First of all, keep up the good work!

My PI renewal date is the 19^th of August. My firm has never had a complaint.

We have never undertaken occupational pension transfers, equity release and have never sold an endowment. Those are the areas they usually focus on in their ever-lengthening renewal forms, as you probably know, with PPI getting a look-in in recent years.

However, we have placed certain clients into UCIS funds in recent years.  Two pages in their form were only interested in this part of our business. Surprisingly there was little mention of UCIS the previous year.

Having answered them totally honestly of course, they have now declined to even quote a premium!

I have gone to another specialist PI insurer who apparently is happy with UCIS – again they will not even provide a quotation.

The issue I am sure is that I have clients invested in both the EEA fund and Connaught Income Fund Series 1.

Even though I have made it plain that I do not require the new insurer to cover business undertake in previous years as this was covered under the PI insurer we used at that time, they still have no interest in quoting.

Obviously these are both gated funds and as such investors cannot get their money out of them at present. This apparently makes us the equivalent of ‘lepers’ and clearly we are now classed as ‘toxic’ (I use the term deliberately).

You may know the issues surrounding the EEA fund. Margaret Cole then of the FSA made a speech effectively saying all Life Settlement funds are toxic and retail investors should not touch them with a bargepole. The result was every IFA the following day tried to get their clients out of the (previously excellent) fund, and of course it had to stop all redemptions due to the ‘run’ on it’s assets.

Well done FSA, you have proved beyond all doubt that these funds do indeed carry liquidity risk – when you cause everyone to try and leave them at the same time, as advisers are petrified of your sweeping powers, your obsession to over regulate the adviser sector whilst all around evidence unfolds of the very greatest abuses going on in an industry that dwarfs us in every possible way (Libor being the latest scandal missed by the FSA), and your unrelenting, over the top aggressive stance whenever dealing with IFA’s generally.

The EEA fund has an anticipated average life expectant of 23 months on the remaining policies it holds. It’s previous LE projections have been proved accurate and the average policy has come in at 66% of the original projected LE. Even after that battering, the suspended fund is working well and has more than enough cash to pay it’s way in the coming months when further maturities should occur. It has consistently made money for investors over several years when many investors do not want to go near the stockmarket for fairly obvious reasons - but of course the regulator knows better and thinks we should all be invested wholly in nice regulated unit trusts. Just because they are covered by FSCS, this does not of course mean that those poor consumers will get a 100% refund if they lose 50% of the money they have placed in that nice unit trust, no one seems to have joined the dots up here. As long as the unit trust is liquid, and does not actually default (go completely bust) then there is no compensation under FSCS.

Fantastic logic.

Of course Connaught were visited by the FSA some months before they announced that two of their loans looked as if they may default and there were not enough assets to pay back the loans made in those cases. The FSA will have had ample opportunity to look at their books and see what they were lending on. With all their resources it seems they do not see anything and their only action was to force Connaught to remove the words ‘low risk’ from the fund name and literature. Obviously they were right to do this but it does beg the question of how hard they actually looked at this fund, which lent on UK property based assets.

There must have been hundreds of IFA’s that placed clients into these funds and who will soon have the same problems I am experiencing.

I have just paid my levy fees, which I see are up over 88% on last years (up over 170% on 2010’s).  This is all down to the increase in the FSCS levy which has taken my fees as a one man firm from £ 199 in 2010, to £ 858 in 20112 and now to £ 2,454 in 2012.

This means that as a 1 adviser form, my share of this levy has increased in two years by a staggering 1230% (and by 286% in the last year alone).

This seems to be the only thing increasing in this industry – aside of course from the 15% expansion in the FSA and no doubt, their salaries, pensions and bonuses.

So to recap, I have clients partly invested in Connaught Series 1 income fund, who may lose 10% of their capital invested in that one fund. I have clients invested in the EEA fund who look like they will actually get all their money back with growth throughout the entire period to when it winds up in a little over 2 years. In that case it has been an inconvenience at best – and the majority are invested via Sipps so they cannot access the cash anyway.

On this basis I am apparently uninsurable and can no longer earn a living in this business to support my wife and two children.

Well done FSA, what you cannot achieve directly, you have achieved indirectly by stealth through the back door. By hammering advisers repeatedly and imposing what appear at times to be totally arbitrary fines and punitive awards, you have decimated the ranks of those remaining PI insurers willing to play Russian roulette with what has now become an ultra high risk sector to insure – the hapless IFA in 2012.

How lucky we are to have a ‘World-class regulator’ in the UK, showing the rest of the World how to destroy, sorry control - the sector.

If you have any idea what other IFA’s are doing I would appreciate any feedback you have.

It looks like my holiday in August with my family is not going to be much fun if I am out of business when I return from them.

Panacea Comment