Lehman clause threat to IFAs
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Advisers have been warned they could have multi-million-pound exposure to Lehman-backed structured product claims owing to exclusions in professional indemnity (PI) insurance policies.
Gareth Fatchett, a partner at Regulatory Legal, who is advising IFAs on structured exposure, says the bulk of policies he has seen include an exclusion relating to insolvency of the underlying counterparty or provider which could give rise to uninsured claims.
The Financial Services Authority (FSA) has launched a wide-reaching review of the structured product market after uncovering significant advice failings. It is instructing firms to review past sales of Lehman-backed plans and is writing to Lehman-plan investors with complaint guidance. Fatchett says this could trigger a large number of claims and advisers may not be covered.
“The FSA notice on structured products creates an iceberg which many firms will not see until it is too late”
Gareth Fatchett
He says: “The FSA notice on structured products creates an iceberg which many firms will not see until it is too late. Many firms do not understand the holes in their PI policies.”
Fatchett says the exclusion clauses started to appear in early 2009 and elements of risk relating to structured products have been excluded from cover at renewal by several insurers. He is forming a structured product group to help firms assess their PI cover and review past business.
PI insurer QBE European Operations says its basic policy features such an exclusion, but it also writes custom policies with no exclusion.
A spokesman for PI insurer RSA says: “We do not apply a blanket structured products exclusion. For some policies, however, we do exclude elements of risk relating to this, for example, failed counterparties.”
Martin Archer, legal director at Collegiate Management Services, says of the 10 firms underwriting most of this business, about five have exclusions. “There are some quite nasty exclusions which will leave IFAs horribly exposed following the FSA’s action on Lehman,” he says.
Ian Boscoe, managing director at PYV, says: “The majority of wordings from insurers do exclude insolvency. However, insolvency exclusion clauses are significant in instances where it is determined the intermediary has been negligent in dealing with their client. So far, I have not seen instances where negligence has been proven.”
