Professional liability – a year in review

As 2024 draws to an end, we take a look back at the claims trends we’ve seen over the last 12 months in relation to matters involving financial professionals, construction professionals and solicitors, as well as our predictions for 2025.

Financial professionals

It’s been another busy year for financial professionals, with the FCA’s Consumer Duty picking up steam (and extending to include closed products); proposals to begin charging Claims Management Companies for bringing a Financial Ombudsman Service (FOS) complaint and the new Labour government pushing ahead with plans for audit reform. But what does this mean for the financial services market and those that insure them? Well, professional negligence claims against financial professionals have been on the rise, reflecting the evolving regulatory environment, increased client awareness, and heightened economic pressures.

The mis-selling of financial products, such as unsuitable investment schemes, pension plans and insurance products has been a prevalent issue for years and whilst the number of complaints in 2024 didn’t reach the levels of 2018-2020, it remains a clear issue for the IFA market in particular. The numbers weren’t helped by the high-profile campaign by ‘Money Saving Expert’ Martin Lewis who has led calls for compensation for consumers who paid for hidden car finance commission. The allegations were that Discretionary Commission Arrangements (DCAs) had been included in thousands of car finance deals. What this meant was that finance dealers were paid commission, without consumers knowing. FOS were quick to pick up on this new ‘scandal’ and published a 64 page decision – showing the seriousness they are giving to such claims (some might say such a lengthy decision will be used as a template going forward…). Any professional that receives a commission payment (broker, estate agents etc) may want to consider if they are being transparent enough to avoid claims. And with the maximum FOS limit having increased to £415,000 in 2023, it’s much easier for complaints to be made without risk to the consumer.  The market (and their Insurers) will need to be mindful of the potential increase in complaints.

Claims against accountants continue to increase, with over 30% of the complaints we’ve seen relating to auditing. It’s clear that with an increase in insolvencies in recent years, focus is turning to auditors, to establish if there was anything that could have been done at an earlier stage to prevent the insolvency. This has been fuelled in recent years by the high-profile collapses of businesses such as Patisserie Valerie and Thomas Cook. Exactly when audit reform will be implemented remains to be seen, but the dominance of the ‘Big Four’ will likely be reduced, with the new watchdog,  the Audit, Reporting and Governance Authority (ARGA) aiming to improve competition. One such change includes the introduction of ‘challenger’ firms – who will undertake part of the work on audits of the larger companies. Oversight from another auditor could expose any issues that may have occurred at a much earlier stage. Of course, this could reduce the overall loss (highlighting any errors before they cause significant damage) but it equally means more claims could be made.  

Looking ahead to 2025, we anticipate that the number of complaints against the financial services market will continue to rise, particularly with the increase in regulatory oversight. Whilst we haven’t seen a huge number of complaints relating to the FCA’s Consumer Duty, we anticipate such claims (perhaps not based solely on, but referencing the Consumer Duty) will begin trickling in over the coming 12 months. Despite this, FOS’ plans to charge Claims Management Companies might see a slowing down of the recent trend of yearly increases in complaint numbers (though we’re not suggesting the numbers will decrease). For the first time, Claims Management Companies will be unable to refer every complaint to FOS without any financial burden to them. This could mean fewer complaints, fewer notifications to Insurers and a slightly more positive outlook than in recent years. We’ve also seen a resurgence of Covid-19 related claims, particularly against accountants and brokers and expect this to continue into the New Year. Whilst the pandemic may feel like a lifetime ago, primary limitation for such complaints won’t begin expiring until 2026 and so there are likely to be more to come. 

Construction

The difficult economic climate means that we have unfortunately seen an increase in insolvencies and this is particularly prevalent within the construction industry. Main contractors appear to have been particularly vulnerable to economic difficulties. As a result of a rise in insolvencies, an increased number of claimants are looking to pursue claims directly against the insolvent companies’ insurers  via the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act).  This trend is likely to continue while the current economic difficulties persist and it might result in a larger number of disputes going to trial. Under the 2010 Act, third parties (such as employers and developers) have the right to bring proceedings directly against insolvent companies’ insurers, without first having to establish the liability of the insured. 

We have also seen a number of key judicial decisions relating to the 2010 Act this year – for example, Scottish Gas Network PLC v QBE UK Ltd [26.09.2024] , a default judgment obtained against an insured in Scotland, which, in effect, binds insurers under the 2010 Act.  If followed in the English courts, we may see a rise in the number of successful claims against insurers under the 2010 Act where, due to a default judgment already obtained against the insured, the only line of defence available to insurers is the argument that the liability is not covered or excluded from the policy.

Insurers may face further difficulties as a result of the decision in Riedweg v HCC International Insurance Plc [11.11.24].  Here, the court held that an insurer sued under the 2010 Act was unable to bring a contribution claim against a third party pursuant to the Civil Liability (Contribution) Act 1978, because  an insurer’s liability to indemnify under a policy of insurance was not the “same damage” as the damage which was suffered by the claimant. Therefore, the third party in that case was not potentially liable to the claimant for the “same damage” as the insurer.  As a result, insurers may be prevented from making a recovery claim against a third party, where the insured (if solvent) would have been able to seek a contribution. 

Looking ahead to 2025, we expect we will continue to see a number of fire safety related claims, particularly as the Government seeks to increase the urgency to remediate unsafe buildings by 2029 via the Remediation Acceleration Plan.

Solicitors

Our data shows that the number of claims against solicitors has been rising for the last fifteen years, with each consecutive five year period showing a rise in the number of claims.  The last five years (since 2019) has seen a particular spike in the volume of claims being made driven by  higher numbers of lower value (less than £100,000) claims.

The last 18 months saw the continued trend of high volumes of claims in the solicitors PI space with the property practice area dominating, with the most claims.  Claims from this practice area accounted for 46% of all claims in the year - 36% of those claims related to the provision of negligent advice. Litigation accounted for 20% of practice area claims whilst private client accounted for 16% of all claims.  There were two data points which were of special interest:

1. Despite accounting for less than a fifth of all claims, the private client practice area accounted for a staggering 68% of damages claimed across all claims.
2. Claims against solicitors arising from data breaches accounted for less than 1% of claims. This is unlikely to be demonstrative of a diminishing importance in data protection issues, partly as this is just claims against solicitors (and not claims for data breaches reported by solicitors themselves).  We expect data protection issues to continue to trend towards the top end of the list of priorities for all firms for the foreseeable future.

Negligent advice was the most common cause for claims, accounting for 32% of all claims. This was double the percentage of the next cause for claims with ‘failure to provide advice’ coming in it at 16%.  Dishonesty was the cause for 7% of claims and due diligence failings was the cause of 5% of all claims.  This latter cause being particularly noteworthy as all the claims with this originating cause came from the property practice rea.

Looking ahead to 2025, the data suggests that the property and private client areas will continue to catch the eye of insurers as practice areas presenting the largest areas of risk, and it will be interesting to see whether the changes in practice that had to be implemented as a result of the Covid-19 pandemic will lead to these two areas accounting for even larger amounts of claims in the coming years. The recent tax changes implemented by the Labour government could result in even greater numbers of claims in this area. This could, in turn, lead to greater pressure on premiums for firms who specialise in this area. 

The data breach space will continue to be closely monitored and we expect that firms will need to commit ever greater resources to this area in order to minimise the number of claims. It will be interesting to see whether a spike in claims arises, despite the likely need for greater resources to be deployed.  Insurers should keep a close eye to ensure that Insured’s have sufficient protections and training in place to combat the threats that data breaches represent.

Read other items in Professions and Financial Lines Brief - December 2024