The Personal Finance Society (PFS) has warned that expensive and limited professional indemnity (PI) insurance coverage could potentially push advisory firms into bankruptcy.
According to the financial services industry body, this is causing firms to turn away clients who need government-mandated advice on defined benefit (DB) pension transfers, as some insurers are only willing to cover part of the maximum award if a claim is made.
Additionally, advisers are being subject to massive scrutiny and time delays to just get PI coverage quotes, the PFS added.
But insurance brokers are blaming the current situation on the decreasing number of firms offering this type of coverage, which is causing them to struggle with the application process.
Additional case studies
The PFS has heard from firms all over the UK and, in some instances, the PI premiums increases were a hundredfold or more.
One company stated that, in 2018, the best quote it could get was £112,000 ($146,100, €134,867) compared to the £22,736 it paid for coverage the previous year – a nearly 400% increase in 12 months.
Another firm revealed a £41,300 rise over the last decade.
“A Scotland-based advice firm experienced a threefold increase to professional indemnity insurance premiums in January, with an increase in excess for DB pension transfers, plus the level of cover for future DB transfers was restricted to £160,000 and not the full Financial Ombudsman Service limit [of £350,000],” the industry body added.
A Surrey-based adviser, who saw a 47% hike in his PI premium at renewal, told the PFS: “The Financial Conduct Authority (FCA) are quick to make changes, slow to undo the damage those changes inflict on an already beleaguered sector.”
The UK watchdog, however, was already aware of the massive increase in premiums; as it found, in a study last year, that costs would rise between 200% and 500% in worst-case scenarios.
Limiting access to DB market
Keith Richards, chief executive of the PFS, said: “Financial advisers who have never had a single complaint made against them are being frozen out of the DB pension transfer market because of PI premium hikes and restrictions on cover.
“Problems with PI cover are causing financial advisers to exit the DB transfer market and limiting the public’s ability to access the financial advice they need to exercise pension freedoms.”
Throughout 2019, the FCA found that 21 firms were operating within the DB pension transfer advice space without PI cover, and an additional 24 were stopped by the regulator over “significant bad practice”.
Richards continued: “We are sharing this evidence with the FCA and HM Treasury as part of our renewed calls for an alternative to the current PI insurance market and Financial Services Compensation Scheme (FSCS) levy.”
In January, International Adviser reported that financial advisers were asked by the FSCS to pay an additional fee, on top of their yearly one, calculated at 0.25% of their annual turnover, to pay for the rising number of Sipp complaints.