Financial adviser mis-selling and suitability claims: how PI responds
Reviewed by Matthew Bartlett, Director, Apex Insurance Brokers Limited · Last reviewed 2026-08-05
Suitability sits at the heart of regulated financial advice. Under the FCA's Conduct of Business rules (COBS), an adviser making a personal recommendation must ensure it is suitable for the client's needs, objectives, knowledge, experience and capacity for loss. When a client later says that test was not met — the risk was too high, the product too complex, or the recommendation driven by commission rather than need — that is a suitability or mis-selling allegation, and it is exactly what a firm's PI cover exists to answer.
What counts as a mis-selling or suitability claim
These claims rarely arrive labelled as lawsuits. More often they begin as a complaint letter, an adviser's own realisation that something went wrong, or a solicitor's letter on behalf of a disgruntled client. Common themes an adviser might face include:
- A recommendation that did not match the client's stated attitude to risk.
- A pension transfer — particularly out of a defined benefit scheme — where the client says the downside was not properly explained.
- A product that was too illiquid or too complex for the client's circumstances.
- Advice where the client alleges a conflict of interest or inadequate disclosure of charges.
- An ongoing service the client paid for but says they never received.
PI cover is written on a claims-made basis. That means the policy that responds is the one in force when the claim is made against you or notified, not the one in force when the advice was given. This is a critical distinction for advisers, because a suitability complaint can surface years after the recommendation. Keeping continuous cover, and notifying circumstances promptly, is what keeps you protected.
How the Financial Ombudsman Service fits in
Most retail advice complaints that are not resolved directly reach the Financial Ombudsman Service (FOS). An eligible complainant — typically a consumer, or a small business or charity within FOS eligibility rules — can refer a complaint free of charge after the firm's final response, or after eight weeks if no response has been given.
The Ombudsman decides what is, in its view, fair and reasonable in the circumstances, taking account of the relevant law, regulations, regulator guidance and good industry practice. It can direct a firm to pay redress up to the FOS binding award limit that applies to the complaint (the limit is set by the FCA and is periodically reviewed, so always confirm the current figure). A decision the consumer accepts is binding on the firm.
PI policies generally treat a FOS award, and the cost of handling the complaint, in the same way as a court claim — but the detail is in the wording. Some points to check with your broker:
- Ombudsman awards: confirm the policy responds to FOS determinations, not only to civil claims.
- Complaint-handling costs: whether time and cost spent responding before a formal claim is covered.
- Ex-gratia settlements: whether goodwill payments made without insurer consent are excluded.
What PI does and does not pay for
A well-structured PI policy for a financial adviser usually brings together three things: the cost of investigating and defending the allegation, any damages or redress the firm is liable to pay, and claimant costs where applicable. Here is a broad guide — your own wording governs.
| Typically covered | Typically excluded or limited |
|---|---|
| Legal defence and investigation costs | Deliberate or dishonest acts |
| Compensation / redress for unsuitable advice | Regulatory fines and penalties |
| FOS awards within the policy limit | Prior known circumstances not disclosed |
| Claimant costs where awarded | Trading losses / investment performance itself |
Two limits matter most. The limit of indemnity is the maximum the insurer pays — commonly offered as generic options such as £1m, £2m or £5m, though the right figure depends on your permissions, client bank and the FCA's minimum requirements for your firm type. The excess is the amount you carry on each claim. Advisers doing higher-risk work, such as defined benefit pension transfers, should expect insurers to scrutinise that book closely and may see specific terms attached to it.
Reviewing your PI cover before a complaint lands is always cheaper than discovering a gap after one does.
Get a PI quote →Illustrative scenarios
The following are anonymised, illustrative examples of how a suitability claim can unfold. They are not real cases and use no real figures.
The cautious investor. An adviser recommends a portfolio to a client who has recorded a low attitude to risk. Two years on, a market fall leaves the client nursing a loss and complaining that the holdings were more volatile than they understood. The dispute turns on the suitability file: fact-find, risk questionnaire and the suitability report. PI would fund the defence, and — if FOS or a court found the recommendation unsuitable — the redress needed to put the client back in the position they should have been in.
The pension transfer. A client transfers benefits out of an occupational scheme on advice. Later, they argue the guaranteed benefits given up were not properly weighed against the flexibility gained. Because DB transfer work carries elevated risk, the adviser's PI terms may include a specific excess or condition for this activity — which is why understanding your wording before writing such business matters.
The ongoing-service gap. A client paying an ongoing adviser charge complains they received no annual review for several years. The allegation is less about the original recommendation and more about the service promised. Redress here can include refunding fees paid for a service not delivered — a reminder that suitability obligations do not end at the point of sale.
In each case, the practical value of PI is not only the payment at the end. It is the defence support, expert input and claims handling that a solo adviser or small firm could not resource alone.
Getting the most from your cover
- Notify early. Report claims and circumstances as soon as you are aware. Late notification is one of the most common reasons cover is prejudiced on a claims-made policy.
- Do not admit or settle alone. Making an admission or a goodwill payment without insurer consent can breach a condition of the policy.
- Keep your files. A complete, contemporaneous suitability file is the single strongest defence to a mis-selling allegation.
- Mind run-off. Because claims can arrive after you retire or close, run-off cover keeps the claims-made trigger available for past advice.
Common questions
Does PI cover a Financial Ombudsman award?
Most advice-firm PI policies are designed to respond to a FOS determination in the same way as a court judgment, up to the policy limit and subject to the excess. Confirm your specific wording, as some policies treat complaint-handling costs and ex-gratia payments differently.
What if the complaint relates to advice given years ago?
PI is claims-made, so the policy that responds is the one in force when the claim is made or notified — not when the advice was given. This is why continuous cover, and run-off cover after a firm closes, are so important.
Are regulatory fines covered?
No. FCA fines and penalties are generally excluded from PI cover as a matter of public policy. PI answers civil liability and redress to clients, not regulatory sanctions.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This guide is general information, not advice on a specific policy or a substitute for your policy wording.