Financial advisers left uncovered

Special report
By Simon Gompertz BBC Two's Working Lunch

One in 10 financial advisers is not covered by insurance to protect customers against negligent advice.

But they are still carrying on in business, which is in breach of the Financial Services Authority's rules.

The problem is that premiums for professional indemnity (PI) have shot up following a series of financial mis-selling scandals.

Some advisers have seen their premiums rise by four or five times - others cannot get cover at all.

Closed down

The issue has been kept under wraps because any financial adviser admitting they haven't got adequate insurance against their own negligence would risk being shunned by their clients or even closed down.

One adviser got in touch with Working Lunch to say that he is having to carry on trading even though he has no insurance.

Gareth Fatchett: "Catch 22"

Adviser and lawyer Gareth Fatchett is well aware of the scale of the problem.

His company sent out a questionnaire to advisers. It believes that out of 5,000 IFAs authorised to trade, 10% don't have the appropriate insurance cover.

"It's a Catch 22 for them because if they have no professional indemnity they would be personally responsible and technically they could be in breach of the FSA's rules," says Gareth.

Well established

While investors might blame the adviser, he argues that the issue is not quite so simple.

"A lot of these businesses are well established with a very loyal client bank and if they just left the rules to their natural devices they would go bust."

The Financial Services Authority has just begun consultations over the problem. But in the meantime, it is trying to be reasonable with advisers.

"We are more than willing to work with individual IFAs - and indeed are doing so at the moment - who are unable to get cover," says the FSA's investment firms director, David Kenmir.

David Kenmir: "Must have adequate resources"

However, he says they are allowed to trade "only if we deem that overall they have adequate resources. They are required under the legislation that we operate to have adequate resources."

One insurance company, St Paul, said pensions mis-selling, the endowments business and the sale of split capital investment trusts - all of which have prompted mis-selling claims - had pushed up premiums.

Clients can sue

"Clients who believe that the advice they have been given is at all less than perfect will not hesitate to sue and insurers need to charge PI premiums which will reflect that," says the company.

Customers should obviously check that their adviser has cover.

However, it's not when the mis-selling took place that matters, but if your adviser was insured when you put in your complaint.

If you have no luck taking action against an individual adviser, there is the Financial Services Compensation Scheme, but that has an upper limit on claims and it can take a long while to push claims through.