Mis selling liability provision in accounts

Mis selling liability provision in accounts

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I have an Investment Consultant client (sole trader) who feels that he may have some possible future exposure for the mis-selling of investments, although as he doesn't know if, or when, or how much liability may arise, he has requested that a provision is made in his accounts for a possible future liability, which is understandable.

His PI insurance has an excess for each and every claim and therefore the provision could easily be quantified as the amount of excess multiplied by the number of clients affected.

However, the client feels that the insurers may try to wriggle out of paying out on such claims and feels that a higher provision should be made in the accounts, which he has not, as yet quantified.

I was therefore wondering whether anybody else had any experience of this type of provision being made and how they went about quantifying the amount provided.

Replies (11)

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By johngroganjga
10th Jul 2013 12:59

Why does client want this provision included in his accounts?  Not to obtain tax relief on it by any chance?  Or is he just a stickler for accurate and prudent financial reporting? 

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Replying to Vaughan Blake1:
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By Xcast
12th Jul 2013 13:45

Presumably.....

no tax relief would be available on the provision anyway until such time as liability actually materialises.

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By Steve Kesby
10th Jul 2013 13:09

FRS 12

There needs to be:

a present obligation,as a result of past events,to make a future transfer of economic benefits,which can be reliably estimated.

If your client is saying that it's an occupational hazard that some policies are inevitably missold, then it's probably on a footing with a warranty provision (acceptable under FRS 12 and, therefore, for tax purposes).

The difference is a warranty provision can get past all four requirements, whereas you only seem to be managing the first four.

Are there any industry statistics on misselling?

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Replying to Mott the Hoople:
By johngroganjga
10th Jul 2013 13:18

All good stuff

Steve Kesby wrote:

There needs to be:

a present obligation,as a result of past events,to make a future transfer of economic benefits,which can be reliably estimated.

If your client is saying that it's an occupational hazard that some policies are inevitably missold, then it's probably on a footing with a warranty provision (acceptable under FRS 12 and, therefore, for tax purposes).

The difference is a warranty provision can get past all four requirements, whereas you only seem to be managing the first four.

Are there any industry statistics on misselling?

All good stuff Steve but we need to know why client wants provision first don't we.  If he's self employed he can put whatever he wants in his accounts if it will make him happy but FRS12 only comes into play if he wants tax relief.  Hence the questions in my first post. 

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By Xcast
10th Jul 2013 13:56

These are specific policies

I have been advised that the policies involved (less than 10 out of several hundred) are in High Risk funds, which have currently been suspended and could therefore be challenged as mis-sold. They are therefore clearly identifiable as a present obligation, as a result of past events which could result in a future transfer of economic benefits, and which can be reliably estimated if the policy excesses are used to calculate the potential liability.

However, it is the possibility that the insurers may not meet the claims in full that has prompted a consideration for a greater provision, which obviously cannot be quantified, or reasonably estimated, which is of course a "crystal ball" type calculation.

Obviously, the client is aware of the major banks making provisions in their accounts for this type of provision and is aware that any provision will reduce his personal tax liability. However, I assume that any claims would be covered by the Statute of Limitations rules and if no claims had been made after 6 years the provision would have to be written back to his profits and the additional tax paid accordingly.

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By Steve Kesby
10th Jul 2013 14:05

What you're describing

Falls within the definition of a contingent liability, rather than a provision.

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By johngroganjga
10th Jul 2013 14:08

What is the basis for the belief that the insurers will try to avoid liability.  Has your client confessed to a mis-declaration or some breach of the policy conditions.

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Replying to FirstTab:
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By Xcast
10th Jul 2013 14:32

Thanks. I think that I can see which way this is heading

johngroganjga wrote:

What is the basis for the belief that the insurers will try to avoid liability.  Has your client confessed to a mis-declaration or some breach of the policy conditions.

The answer to your first question is that I am waiting to hear from the client on this and to the second, no, not as far as I am aware.

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By johngroganjga
12th Jul 2013 13:56

No -  tax relief will be due

No -  tax relief will be due on a valid FRS12 provision when it is made.  One of the areas where tax simply follows GAAP.

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By Xcast
12th Jul 2013 14:21

But not on a Contingent liability

Is that correct?

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By johngroganjga
12th Jul 2013 14:55

Yes a contingent liability is, by definition, not provided for in the accounts so there is no deduction in the accounts to claim tax relief on in any event.

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