The Financial Services Authority (FSA) must take into account differences between various items of legislation when conducting reviews, according to the Association of Independent Financial Advisers (AIFA).

AIFA makes the assertion in its response to the FSA's Review of the Prudential Rules for Personal Investment Firms, published earlier this month.

In particular, the requirements for Professional Indemnity (PI) insurance put in place by legislation such as the Markets in Financial Instruments Directive (MiFID) must be considered to ensure firms are not presented with conflicting minimum requirements, AIFA warns.

Moreover, the association suggests that the FSA has unfairly targeted independent financial advisers (IFAs) during its review, with little sign that it adequately understands the needs of the sector or is willing to generalise to address the industry as a whole.

Fay Goddard, deputy director general of AIFA, comments: "The repeated inference that firms make conscious decisions on their propensity to mis-sell - and that the capital they hold reflects this - is extreme and does not address the real debate about the purpose and role of capital."

In its response to the review, AIFA notes that, following FSA guidance, many firms opted into the MiFID legislation, but may still not be subject to the Capital Requirements Directive.

"Virtually all of the firms opting in to MiFID undertake insurance - life and pensions - business and as they will have PI insurance cover to meet Insurance Mediation Directive prudential requirements, the capital requirement for the majority of these firms will be €25,000 - approximately £17,500," the association observes.

The response continues that it seems unlikely that the FSA should impose prudential requirements in excess of this on Personal Investment Firms (PIFs), or to raise the minimum levels for non-MiFID firms above those put in place by the directive.

Furthermore, AIFA disagrees with the FSA's view that there are failures in the advice given by PIFs, arguing that it is inevitable that there should be some discrepancies between the guidance given by different individuals.

Arguing that "information asymmetry is inherent in virtually all professional services", the association calls instead for a focus to be placed on ensuring consumers understand the advice they are given and that it is relevant to their needs.

The organisation follows this by asserting that the very existence of regulation is symbolic that some protection is necessary to make sure that IFAs and other advisers adequately serve their clients.

But Ms Goddard identifies a direct link between the happiness of clients and the successful continuance of IFAs, as many are small businesses, which could mean they rely on repeat business from their customers.

As a result, she contends that IFAs are typically "risk averse" and go to "great lengths" to make sure they meet the standards required of them.

Significantly, AIFA disputes the suggestion that PI providers do not consider the risks posed by a particular firm when deciding whether or not to offer cover.

"Firms with a bad claims experience will have problems getting PI cover even when the current market is soft. This being the case, there seems little incentive for a firm to mis-sell under the assumption that any claims will be dealt with by their PI insurance," the association explains.

And having consulted with practitioners within the PI market, AIFA concludes that a shift away from the traditional claims-made basis for PI policies is unlikely, recording a "resounding no" from those approached within the industry when asked their response to such a suggestion.

Recent media attention and activity from the FSA relating to the soft PI market is suggested as having played a part in reducing the availability of favourable renewal rates for IFAs.

Despite this, the general view of PI cover from IFAs is that it is an unavoidable business expense to be met in case of catastrophe or extreme negligence, AIFA concludes.

PYV are one of the UK's leading providers of professional indemnity insurance. This news article has been produced by Adfero in collaboration with PYV and its unauthorised use is not permitted.