Patrick Hill, Partner and Head of Professional Risk at international law firm DAC Beachcroft offers some fascinating predictions on the challenges that professionals and their PI insurers may face in the coming year and beyond.
This is essential reading for any professional services firm but in particular Accountants, Solicitors, Surveyors and Financial Advisers.
- Surveyors: Property valuation is likely to be complicated by environmental concerns
- Accountants: FRC investigations will increasingly move into the boardroom
- Insurance Brokers: Increased E&O risks for insurance brokers in a hard market
- Financial Advisers: The threat of claims from defined benefit transfers will continue to hang over financial advisers
- Solicitors: Get rich quick schemes bad news for the profession and insurers
- Surveyors: Caution and capacity will continue to challenge surveying professionals
- Financial Advisers: The rise of robo-advice will continue to disrupt the wealth management industry
- Accountants: 2020 is the year that the ICAEW follows the FRC’s lead
- Solicitors: Solicitors’ conduct under scrutiny
- Legal Indemnity: PropTech presents an opportunity for legal indemnity insurers
- Technology E&O: AI and blockchain will move from noise and talk to practical applications
- Education: Mismanagement of abuse allegations leads to a growth in claims
As automated valuation model technology fast becomes the primary valuation tool for lenders, and surveyor input is restricted to the more difficult cases, the impact of environmental change should not be under-estimated. Flood risk analysis is likely to come into sharp focus as predictions suggest properties at risk will more than double by 2050 to 1.9m. Similarly, as awareness of localised air pollution data rapidly grows, momentum is gathering pace for a ratings system to be introduced. Adverse conclusions in either instance are likely to result in certain localities falling out of favour, which would inevitably have a potentially dramatic impact on values. The availability and accuracy of such data, not to mention the skill of its interpretation in valuation terms, is going to be a critical ingredient of future valuation methodology.
The Financial Reporting Council (FRC) already regulates finance directors in their role as qualified accountants, but the boards of troubled corporates will not escape the FRC’s censure in 2020 and we may see the FRC testing the limits of its investigatory powers to compel evidence from plcs themselves. This matters where corporates and directors are embroiled in high-profile corporate collapses with millions or even billions at stake and the real threat of jail time. Where public criticism leads, civil claims follow. 2020 will also see judgment in the FRC v Sports Direct appeal, a decision that casts doubt on the privilege in documents handed to an auditor.
A significant contraction in capacity in certain commercial lines, including cover for construction professionals and surveyors, increases the risks faced by insurance brokers. Changing insurers gives rise to some significant risks for brokers, who must advise their clients about any new and onerous terms that might be introduced and whether the new cover is more restrictive. New insurers will also scrutinise whether there was a fair presentation of the risk, or whether a claim falls to an earlier policy period or notification. Brokers will also have to plan renewals well in advance, to avoid their clients being left without any renewal options, where capacity and available markets have reduced.
Financial Advisers: The threat of claims from defined benefit transfers will continue to hang over financial advisers
Since the pension freedoms were introduced in 2015 there have been 390,000 defined benefit transfers with a total value £60bn. The Financial Conduct Authority considers the level of transfers to be too high and is in the process of consulting on banning contingent charging and making other changes to its rules to make such transfers more difficult to recommend in future. It is also closely scrutinising past transfers, withdrawing permissions, imposing past business reviews and taking enforcement action against a number of advice firms. The risk of claims is high and financial advisers are finding it increasingly difficult to obtain professional indemnity insurance as a result. There is also ongoing uncertainty as to the duties of pension providers, especially Self Invested Personal Pension providers, in this context with a number of court decisions pending.
Claims by investors arising out of so-called buyer funded investment schemes are flooding the insurance market. Investors have lost money purchasing parking spaces, storage and office units, hotel rooms, student flats and even carbon credits, on a buyer investment model which emerged after the credit crunch. The investors, mainly based overseas, allege that the solicitors failed to advise them about the risks involved in paying up to 80% of the purchase price on exchange of contracts with the developer/ vendor having the right to use the deposits to supposedly fund the developments. The solicitors acting on either side of the transactions are potentially exposed to both claims and Solicitors Regulation Authority (SRA) investigations. These claims have had a huge impact on firms and insurers. The SRA has warned that “a single scheme that goes bad could wipe out the £48m compensation fund.”
Heightened economic and political uncertainty continues to weaken confidence in the property market and, thus, activity. Stock levels remain at near record lows, as do new buyer enquiries and agreed sales. As a consequence, competition between lenders seeking to capture what limited appetite exists has seen the return of 95% loans and, until activity levels improve, the squeeze on revenue streams for professionals continues to bite. Timing could not worse, as capacity levels in the professional indemnity sector have shrunk, producing significantly adverse renewal terms, if offered at all. Market consolidation seems inevitable, and the temptation for some to venture outside areas of specialism or competence in an effort to survive may prove too strong.
Existing financial advice businesses and new entrants are increasingly looking at digital solutions as an alternative to more traditional advice models. Robo-advice will increase competition and potentially allow advisers to reach under-served consumers. However, these developments present challenges for firms in circumstances where the rules and guidance on what advice is and how it is given were developed for an analogue age. A digital solution can enable firms to mitigate risks associated with human advisers but bad design will more directly lead to systematic mis-selling issues.
The Financial Reporting Council (FRC) is staffing up to pursue more enforcement investigations. In 2020, the Institute of Chartered Accountants in England and Wales, the regulator for the audit of smaller and non-listed corporates, will not be immune from the mood music coming from the FRC. However, it faces a difficult balancing act – to demonstrate it is not deaf to public calls for changes in audit standards, while aware that heaping further pressure on the profession may be counter-productive as graduates choose different, less regulated, career paths and smaller entities do not require, or want to pay for, a step change in audit approach.
The #MeToo campaign has increased the Solicitors Regulation Authority’s (SRA) focus on tackling misconduct and harassment. Regulatory obligations of integrity and maintaining public trust in the profession are the hook on which such matters can lead to disciplinary investigation. The well-publicised sexual misconduct case of SRA v Ryan Beckwith resulted in a £35,000 fine and adverse costs of £200,000 despite the absence of a criminal conviction or a finding on the issue of consent. Some commentators have questioned whether the SRA’s approach is proportionate. With a further 25 cases of alleged sexual harassment and misconduct to be heard, the profession faces a difficult 12 months and firms should ensure they have robust procedures in place to deal with such behaviour.
The shift in the real estate sector towards PropTech and the requirement for comprehensive provision of electronic property data presents an opportunity for legal indemnity insurers. Property passports are emerging in the private rental sector as a way of speeding up the letting process. If this proliferates more widely, property owners may come under pressure to identify and address title and defects earlier in the conveyancing process. Early exposure to an insurer or broker will help property owners meet these challenges. Transparency, quality advice and pricing are likely to be the key differentiators in this market.
Insurers will increasingly deploy artificial intelligence (AI) and blockchain based solutions in their underwriting and claims management processes and their customers, particularly large and sophisticated ones, will deploy the same technologies in their claim submission processes. This development will also impact insurers in other ways. The anticipated increase in the deployment of AI, together with the large cost of such solutions and existing skills shortage, are likely to result in an increase in claims in this area.
Claims arising out of the manner in which schools and universities deal with allegations of sexual abuse, particularly in light of the #MeToo campaign, are increasing. Clear procedures need to be put in place to deal with such allegations at the earliest stage to ensure that they are dealt with appropriately. The use of data subject access requests as a tactical procedure by claimants to obtain early settlement offers is growing as the costs of dealing with these requests are often disproportionate to any potential resultant claim.
More articles are available on the DAC Beachcroft website.
All articles are created on a general basis for information only and do not constitute legal or other professional advice. No liability is accepted to users or third parties for the use of the contents or any errors or inaccuracies therein. Professional advice should always be obtained before applying the information to particular circumstances.