Sceptics may have questioned warnings that the soaring cost of Professional Indemnity Insurance would put some advisory firms out of business. They may have to eat their words.

This week we learned that wealth manager Harwood had placed its subsidiary, appointed rep adviser firm Network Direct, into voluntary administration due in part to rising Professional Indemnity insurance costs.

It’s one of the first cases of an adviser firm being put out of business due to PI costs. Fortunately in this case another firm, Adviser Services Holdings Limited (ASHL), has swooped in to take over the remnants of Network Direct and offer its advisers new contracts.

Network Direct’s advisers have been fortunate in this instance. Others in the future may not be.

Some may see Network Direct as a weak business and guilty of its own misfortune but it’s been around for 10 years and its advisers operated as whole of market IFAs. It was no fly-by-night business.

The question now is will others follow suit? It’s too early to guess but there is no doubt that soaring costs, exacerbated by the pandemic, are punishing some firms.

This should not be a surprise. The Personal Finance Society and others have been warning for some time that rising PI costs were hurting adviser firms.

There are a number of reasons for the rise in PI costs and the conditions and excesses some PI insurers are imposing on firms. One issue is clearly worries about the cost of sorting out DB transfer problems. Another is the rising cost of the FSCS levy and complaints costs generally. PI insurers are worried and are pushing up premiums, a natural thing to do for any business faced with increased costs.

It is time to go back to the drawing board.

The PFS has called for Government intervention and for the FCA or Government to be the insurer of last resort. That doesn’t seem too likely in the short term but perhaps the FCA is coming round to some change.

New FCA CEO Nikhil Rathi has voiced interest in some sort of insurance-led approach to rising FSCS levy costs and perhaps that olive branch could be extended to PI.

The FCA is unlikely to want to take on the risk of PI itself but it could create favourable conditions for PI insurers to provide more affordable cover. A meeting of providers and some proposals on change would be welcome.

It will need to act quickly though. The Network Direct case has shown that time is not on the FCA’s side and a slew of adviser firm failures is in no-one’s interest.

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Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with 30 years experience.  This topical comment on the Financial Planning news appears most weeks. Follow @FPT_Kevin