Rising professional indemnity insurance is driving some advisors out of the industry at precisely a time when clients need help in navigating complex markets. Government measures that freed up pension transfers have arguably created a problem now hurting the wealth industry.

The rising cost of professional indemnity insurance (PII) creates fresh tensions between regulators and advisors. Rule-tightening over mis-selling has pushed up insurance premiums, particularly among those offering defined benefit pensions transfers. Some argue that the higher premiums are driving them out of the business, hitting consumers. The Financial Conduct Authority, the UK regulator, has stood by tougher oversight but the row demonstrates how protecting consumers and sector interests is a fine balancing act.

The roots of the problem lie in former finance minister George Osborne’s decision in 2015 to allow those over 55 to cash in their defined contribution pensions and invest as they see fit. The move opened up the floodgates for potential mis-selling as hundreds of thousands of UK pension holders embraced the new freedoms, causing around £50 billion ($64.8 billion) in transfer requests to be processed in the first two years. (When the reforms took place this publication spoke to practitioners in the sector about the risks. There have been a number of mis-selling scandals in the UK linked to pensions down the years.)

Claims flooding into the Financial Services Compensation Scheme were perhaps the inevitable result of a wall of cash coming into the market, giving regulators few options but to review. Looking at transfer activity since 2015, the total value of transfers being advised stood at £82.8 billion, with an average transfer amount of £352,303. So the stakes were not modest. While the regulator suggested that transfering pensions was not suitable for most clients, the market was heavily advising otherwise, begging the question of why pension reforms were introduced in the first place.

Independent Financial Advisors came under renewed pressure last April when the FCA increased the cap on claims awarded by the ombudsman from £150,000 to £350,000, which further drove up premiums. The fallout has left those still administering and insuring the sector firing off salvos on who is to blame and who should pick up the increased due diligence costs to improve standards.

This tension between market oversight and keeping wealth management competitive and efficient goes to the heart of protecting the client and what that means when sectors are at odds on how to carry this out. It is a topic that this news service will be examining more of this year, and fixing the PII problem is a "live" example of how difficult reform and protection can be.

Simon Goldthorpe, chair of financial services firm the Beaufort Group, said the situation has caused “a huge contraction” in the PI insurance market. “We now have a situation where firms that are already insured are struggling to change insurer, and the best an advisor business can often do is hope that its existing insurer will renew,” he told this publication.

“Those that have remained can just cherry-pick what business they want to do, and the industry is not far off the situation where there are no insurers left to cover IFAs at all,” he added.

The Personal Finance Society (PFS) has also said that it expects the number of firms pulling out of the DB advice market to keep on rising as the sector waits for the FCA to publish more advice.

The PFS chief executive Keith Richards, who also chairs the Pensions Advice Taskforce, said this is “in part due to the rule changes, but mainly because of the severe hardening of the professional indemnity insurance market.” This week the society enouraged IFAs to lobby their local MPs on what it sees as a stricken market for consumers.

Goldthorpe said advisors have few options. They either pay the higher premiums or sign indemnity cover that contains so many restrictions that it leaves firms basically insuring themselves, forcing them to “hold additional capital to cover their activities.”

From the insurers' perspective, financial advisors have generated the bulk of insurance claims since rules were relaxed so mostly have themselves to blame for higher premiums. Mercer, as one example in the market, was not available to comment for this article.

PII cover that used to cost IFAs around 1 to 1.5 per cent of their annual turnover now costs closer to 3 per cent, Goldthorpe said. The problem is “this could happen to good quality firms that have a fairly low risk profile,” he said, underscoring what is being seen as a scorched earth approach by regulators.

Acceptable?
At an industry event last November, Debbie Gupta, FCA director of life insurance and financial advice defended the regulator’s position that transfer advice is "still not of an acceptable standard".

"Professional indemnity insurance is in place to protect both firms and consumers and they must serve the purpose for which they are needed,” she reportedly told delegates.

"We expect firms currently offering defined benefit transfer advice to have appropriate professional indemnity insurance in place, in line with our rules. If advisors do not have appropriate cover they should not be advising on defined benefit transfers now or in the future,” Gupta warned. "That includes stopping any pipeline business."

This newswire has contacted the FCA about any subsequent guidance and may update in due course.

Asked how members of PIMFA are being advised, Ian Cornwall, director of regulation at the professional finance body, told WealthBriefing that while the cost of getting PII coupled with the ongoing funding of FSCS compensation are “major costs” and “challenging” for firms, this should ultimately be reflected in the prices they have to charge for their services.

“Firms need to ensure their PII renewal forms are complete and accurate and that they are submitted to their broker as soon as possible so that underwriters have ample time to consider the information and if necessary engage with the firm and their broker,” Cornwall said.

David Inglesfield, CEO at IWP, a services provider to IFAs across the UK, told this news service that while higher renewals and excesses for IFAs are “understandably concerning, one has to recognise that the hypothetical maximum loss values that have been talked about in the sector greatly exceed the premium value of the market, so it’s no surprise that insurers are feeling stressed."

Inglesfield said it is more a question of strength in numbers on how IFAs respond. “One of the trends we are seeing is IFAs seriously considering joining organisations such as ours, both for help in validating the robustness of past advice, as well as in potentially improving their insurance terms.

“On a more positive note, IFAs should remember that insurers do look at individual book quality, and if a firm can evidence high standards they should expect a better premium. However, even for the best cases, premiums are likely to continue to rise”.