Insurers – compulsory PII is the wrong idea at the wrong time

Insurance expert David Blackman assesses HMRC’s proposal to raise standards in the unregulated sector through compulsory Professional Indemnity Insurance (PII).

The insurance industry has been battered by the pandemic, both financially and reputationally, as some of its biggest names found themselves in the dock earlier this year over failures to pay out on pandemic related claims.

So it may seem strange timing for the HMRC to be thinking about introducing a new requirement that all tax advisers should take out PII.

Consumer protection

HMRC launched a consultation in March seeking views on whether PII, which provides firms with cover if they are sued by a client over the quality of their work, should become mandatory for tax advisers.

The move is designed to improve professional standards in the unregulated sector of accountancy.

The Treasury worries that a minority of unscrupulous practitioners are encouraging the take-up of tax avoidance schemes, which are putting added strain on a fiscal base already battered by the coronavirus.

HMRC has identified that two-thirds of complaints about tax agents concern the one-third of accountants who are unregulated.

According to BDO, in 2019, unregulated agents were thought to have helped encourage businesses to overclaim R&D Tax Credits to the tune of more than £600m.

Given that this is just one area of tax policy, the impact of unregulated accountants and tax advisers is much higher. The true cost could be ‘billions in lost revenue’ across the board, according to AAT head of public affairs and public policy Phil Hall.

So, the need to take action is clear. But is HMRC’s proposal a solution?

It faces many questions: is it practical? Is there enough appetite in the insurance industry for unregulated tax advisors PII? Would the desire to bring in exclusions undermine the objective? And will firms that already have PII cover end up paying bigger premiums?

Poor timing

The new requirement is hitting the sector just when the wider PII market is in meltdown.  

The problems exposed by the Grenfell Tower fire disaster have sent premiums for many building professionals, like surveyors, rocketing. Insurance brokers too face hefty increases in their premiums following the recent Supreme Court judgement that insurers had been too restrictive in paying out on business interruption claims at the beginning of the pandemic. 

PII market  ‘broken’

“This seems like an insurance market that is broken,” says Martin McTague, national vice-chair for policy and advocacy at the Federation of Small Businesses.

“It’s not working at the moment: a lot of small business are stuck between a rock and a hard place.

“If the PII market was functioning properly it would be an OK solution: the problem is that the market isn’t functioning.”

Imposing the new requirement would have been easier “three of four years” ago, says Charles Manchester, Chief Executive Officer of Manchester Underwriting, an intermediary that has authority from insurers to underwrite policies on their behalf.

Christopher Jones is Director of Legal and Market Services at the International Underwriting Association, which represents the insurers working in the London market that tend to deal with more specialised types of insurance like PII.

Lack of appetite

There is currently limited appetite for any kind PII across the board, he says: “It’s not viewed as a hugely attractive area at the present time.

“Making it compulsory to have PI doesn’t mean it’s compulsory for insurers to offer it.”

An added complication is that tax advice is already viewed as one of the “more volatile” areas of PI business, Jones says, estimating that around 30% of advisers are small firms engaged in the “more difficult” areas of tax advice that would trigger more claims. 

“Tax advice is a high-risk area of PI, no question: a lot of claims on accountancy are related to tax,” says Manchester, who is also chair of the Managing General Agents Association. 

“Specialist tax advisers pay more and tax advisers working in the more edgy areas of tax avoidance will sometimes struggle to get insurance.”

Mark Brundell, head of PI at Zurich, agrees. “Tax features highly on any mixed accountancy practices claims list: a number of insurers will actively avoid those firms and individuals who operate exclusively in taxation matters.”

Some unregulated tax advisers, like experienced ex-HMRC inspectors, will be able to secure PII cover and typically will have done so when they first set themselves up in business.

But being unregulated will generally be an off-putting factor for underwriters, says Jones: “Tax advice is one of the most difficult areas so if firms are not regulated, it will be even more challenging.”

Premiums

A further dynamic is that the base of premium income for this kind of cover is limited by the small size of the firms that typically offer tax advice, he says: “From an insurance point of view, with what will be a relatively small premium base based on the size of firm, the economic argument becomes difficult.”

Another feature of the tax advice PI market is that claims can easily multiply, says Jones: “One mistake by the same tax adviser can lead to multiple claims. If they make a mistake once, it is likely they will have made mistake on a number of cases so that leads to more expense.”

The level of complaints to the HMRC (see above) is likely to be another off-putting factor, says Hall: “If I was an insurer that would trigger alarm bells in itself. I suspect some insurers won’t want to insure unregulated advisers.”

“This doesn’t mean there won’t be new insurers and opportunities for new entrants,” says Jones.

Manchester admits that he wouldn’t personally be keen to cover unregulated tax advisers.

“It’s not business I will be falling over myself to write. To think that people are giving proper advice on tax and are not currently insured worries me.

“I don’t see it will be regarded as a major source of new business.”

Roundtable feedback

This message was confirmed by the insurance industry representatives who attended a recent AAT roundtable. Hall comments: “A couple said they wouldn’t touch PII with a barge pole.”

Brundell sees little evidence of appetite amongst companies for entering the PII market: “capacity in the market has diminished over the last three years. I’m not aware of new capacity coming in, and it would be a brave decision to come into the UK PII market at this juncture.”

Manchester believes the HMRC proposal would drive some unregulated firms out of business as unregulated individuals find they are unable or unwilling to pay the premiums and seek shelter in firms that have cover already in place,

Jones doesn’t believe insurers will cut back on providing PII to tax advisors firms, which they already cover successfully.

But the new requirement may mean firms that already have PI cover will pay higher premiums. Jones says: “If the 30% identified [as unregulated accountants] are deemed high risk, it may mean the 70% ends up paying slightly more for their insurance. If it brings higher risks into a pool, the overall risk becomes heightened”

Hall agrees that regulated firms are “likely” to face increased premiums. “Insurers will want to cover risks and won’t want to have to distinguish between types of advisor. So we may see increases in premiums.”

But Brundell hopes insurers would be more “sophisticated” and distinguish between regulated and unregulated firms.

A spokesperson for the insurer Hiscox says that while the HMRC’s proposal will set the bar a “little higher” for companies operating in a PII market, which is already struggling to obtain capacity, it is “unlikely” to result in higher premiums for companies not engaged in tax advice.

He says: “Insurers will set their pricing based on the claims performance of these business activities, rather than treating all businesses in the same sector as equals.”

Limitations and exclusions

If pushed to cover a higher risk and unregulated tax firm, he believes it would be necessary to apply very high levels of excess deductions in the event of a claim. He would also seek to exclude tax avoidance or minimisation schemes.

But insufficient detail has been published so far about these issues, like levels of excesses and whether insurers would be able to exclude certain items of business and classes of tax advisers.

Jones says insurers will struggle to make a business case if they can’t exclude unpalatable risks: “The appetite of insurers for these types of business will depend on the level of flexibility they have in the cover they provide. If they (insurers) can’t have policy exclusions, it becomes a much more difficult proposition commercially.

“We understand the broad policy objectives, but there are fundamental concerns. We probably need for more detail about what the proposal would entail before can make a judgement on commercial appetite for it.”

While generally opposed to the unnecessary requirements being imposed on small business, tax advisers should be expected to get PI cover, says McTague: “It’s not an unreasonable question to ask whether we have PI cover.”

PII is not the best approach

But enforcing compulsory PII is not the best way of driving improved standards amongst tax advisers, says Jones: “If HMRC is trying to improve standards in the tax advice market, starting with PI isn’t the best way to do it.

“It’s the wrong way round: we need to look at what we can do to achieve standards at the front end.

“If we can improve standards at the front end, it gives everyone confidence that there is a framework in place to mitigate the number of claims coming through.”

Brundell agrees, backing the AAT’s push for all advisers to be regulated by signing up to a professional body.

 “The answer isn’t to make it mandatory to have PII. They have to be regulated. Asking them to have PII doesn’t do anything: they need to be regulated by an appropriate body.”

The Hiscox spokesperson says that where PII is currently mandatory for professions, it tends to be in a regulated environment and managed by a professional body, such as the RICS for chartered surveyors.

The worry is that the HMRC’s plan to make PII mandatory for tax advisors ends up being, at best, a halfway house solution that fails to tackle the problems bedevilling the sector.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

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