Top 5 Professional Indemnity claims of 2017
2017 was another busy year for Professional Indemnity Insurance (PII) claims, with claims related to tax work making up 33% of all claims reported by accountancy businesses.
The top 5 claims by type are:
- Compliance taxation and account preparation (33%).
- Audit (29%).
- Transactional (16.6%).
- Insolvency and specialist taxation advice (7.5%).
- Accountancy (5.5%).
We have also seen an increase in claims relating to executorships and trusteeships, amounting to 4.4% of the total reported.
What's behind the claims being made?
While there are many situations that give rise to notification of a PII claim, there are some common causes that are ultimately avoidable.
Poor record keeping
One of the biggest issues we have seen across all claim types is poor record keeping of the advice provided to clients. If an accountant has not kept a clear written record of the advice given to their clients, this creates difficulty from the start and makes it very risky to defend a claim through to trial.
Acting outside area of expertise
We have also seen instances where accountants have strayed outside of their agreed retainer to try and be helpful to their client, creating a claim where one might not otherwise have existed. This is also the case where an accountant acts outside of area of their area of experience or expertise.
Information versus advice
Unfortunately some accountants have also overstepped the line between provision of information versus advice. The receipt of substantial commissions on products sold can make it difficult to argue that they did no more than introduce the client. We are, however, now seeing claims start to subside due to limitation.
Tax avoidance schemes
While not as many tax avoidance notifications have turned in to actual claims as were initially feared, those that do are often substantial. Where tax avoidance claims involve High Net Worth individuals, this makes them difficult to defend as the claimant will usually have the financial means to pursue litigation.
Ongoing impact of the recession
Many of our current claims have arisen from a real mix of work which took place before, during and after the last recession. Some of the more significant classes are:-
1. Tax avoidance schemes
- Spike in claims.
- HMRC aggressive action.
- Accelerated Payment Notices (APNs).
2. Claims arising out of failed businesses.
- Negligent audits.
- Tax advice.
- Corporate finance deals.
The future claims landscape for accountants
April 2015 represented a complete shake up of the UK’s pension system, giving people much more control and freedom over their pension savings than ever before. We’re starting to see a steady increase in the number of claims in this area, which could impact accountants where pension advice is offered as a service.
The main issue is that people are now able to access their pension as they wish from point of retirement. Anyone over aged 55 can take whole lot as a lump sum or first 25% tax free and then the rest taxed as if it were a salary at their income tax rate.
The FCA has put a spotlight on this issue, which has attracted wide press coverage. People are being encouraged to complain their advisor when the pension pot runs out, as they haven’t managed their funds well.
Cyber and fraud
Cyber is an ever evolving and emerging risk, which is starting to generate claims in areas such as:
- Cyber fraud - cases are on the rise, particularly in financial services industry.
- Employee fraud or third party fraud.
- Data theft – accountants hold a wealth of client personal financial data.
During 2018 we will delve into the various types of PII claims and provide expert briefings on how to better avoid them.