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UK regulator lays down the law over PI insurance cover

As PFS calls for changes to primary legislation to ensure advisers won’t leave DB transfer market

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The massive rise in professional indemnity (PI) insurance premiums has been a big issue for financial advisers but the UK watchdog has issued a warning to those carrying out advice without cover.

Debbie Gupta, director of life insurance and financial advice supervision at the Financial Conduct Authority (FCA), said during the Personal Finance Society’s annual conference in Birmingham: “I feel I should mention professional indemnity insurance, a matter which is very alive in this sector.

“I want to reiterate [for] the avoidance of any doubt in the FCA’s position: PI insurance is in place to protect both firms and consumers and they must serve the purpose for which they are needed.

“We expect those currently offering defined benefit (DB) pension transfer advice to have appropriate PI insurance in place, in line with our rules.

“If they don’t have appropriate cover, they should not be advising on DB transfers now and in the future, and that includes stopping any pipeline business.

“Simply put, a firm must, at all times, be able to meet its liabilities as they fall due.”

Higher and higher

PI insurers have been spooked by the British Steel Pension Scheme scandal, the more than doubling of the Financial Ombudsman Service compensation scheme limit and the FCA’s supervisory review uncovering poor practice.

Several adviser firms that offer DB transfers have said they are struggling to obtain or afford the mandatory cover, with some quoted a 500% increase in premiums.

The lack of affordable PI cover is reducing the number of advisers in the DB pension transfer market.

But, consumers with DB pension pots of more than £30,000 ($38,963, €35,180) can only exercise their pension freedom rights if a financial adviser who is a pension transfer specialist assesses their circumstances and provides advice.

The requirement doesn’t however stop the individual from proceeding with a transfer even if the adviser’s recommendation is not to do so, which in itself has caused an unintended consequence of insistent client transfers.

This is something few advisers will be prepared to facilitate moving forward, causing further frustrations for consumers.

Call for action

After the general election on 12 December, the PFS said that it will engage with the new government for changes to primary legislation to ensure financial advisers aren’t forced to turn their backs on offering pension transfer reviews.

Keith Richards, chief executive of the PFS, said during the conference, which was attended by International Adviser: “The FCA is continuing with its review of the Financial Advice and Markets Review (Famr), but it has not factored in the availability of PI insurance and the cost of Financial Services Compensation Scheme levies into this strand of work, preferring to deal with these issues separately.

“We don’t think this is the right approach and have previously posted risk warnings regarding the impact of both a hardening PI insurance market and increasing FSCS levy costs over the preceding 24 months.

“The review was an attempt to measure and deal with the advice gap in a holistic way, and we have to make sure all policymakers continue to meet the challenge in this spirit.

“Our task is to convince the new government that there is a need to approach this issue strategically, through primary legislation if necessary, offering a more sustainable solution to financial education and protection.

“At the PFS, we have developed a proposal for payment of compensation and professional indemnity, as well as the funding of consumer financial education in the form of a levy on all retail investment funds – a levy that would add up to a tiny proportion of these funds of only three basis points.

“We will be working with policymakers at every level to turn these ideas into reality in 2020.”

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