Financial services firms are stripping back services as skyrocketing professional indemnity costs tie advisers’ hands

Financial services firms are refusing to provide defined benefit (DB) pension transfer advice as colossal increases in professional indemnity (PI) premiums means many advisers can no longer afford to offer this mandatory service.

Firms renewing their PI insurance this October reported excessive increases in premiums; Breed Elliott Financial Planners, for example, was initially quoted a PI premium 600% higher than what the business paid last year.

Jeremy Glynne-Jones, chartered financial planner at Breed Elliott Financial Planners, said: “The initial increase that we were quoted was nearly 600%. We’ve managed to knock them down a little bit to just over 500%.

“We put budget in place every year because FSCS fees and FCA fees can vary. We always budget to allow for a big increase, but not 500%.”

Sky-high premiums

But what is driving this acceleration of PI insurance premiums? Glynne-Jones observed that anticipation over costs built up during the summer months, as many within the sector speculated whether an FCA review of DB pension transfers was on the cards.

David Smith, chief innovation officer at Uinsure, on the other hand, pointed the finger at the Financial Ombudsman Service’s (FOS) increased compensation award, effective from 1 April 2019.

This stipulated that compensation for consumers and businesses would be set at £350,000, compared to the £150,000 that was previously awarded.

“When pensions transfers started to really kick off, that was a big catalyst and then the increase of compensation levels,” Smith noted.

The effect of this, however, is that it has become increasingly difficult for financial advisers to purchase affordable PI insurance which covered them to provide DB pension transfer advice. “As far as I know, there’s only three PI insurers left who are offering cover for DB pension transfers,” Glynne-Jones added.

Cutting services

This becomes a more pertinent problem when considered in today’s regulatory landscape; if an individual has a DB pension pot worth more than £30,000, it is a legal requirement that they seek professional financial advice when considering a pension transfer.

Yet, many financial services firms are now finding that they are not insured to write new business in this area.

“We’re being forced into a situation where if a client came to us and had a DB pension transfer possibility, or were looking into it for various reasons, we can’t help them,” Glynne-Jones explained.

“The increase in our PI premiums covers DB pension transfer business that we’ve done in the past, but we’re not allowed to write any more, so the PI cover doesn’t cover us with writing DB pension transfer business in the future; if we did, it would be breaching FCA regulations. We’ve been stopped from doing that.”

Blame game?

Keith Richards, chief executive of the Personal Finance Society (PFS), part of the Chartered Insurance Institute (CII), stated that blame can partly be placed at the door of pressured advisers, succumbing to clients’ demands.

“Some advisers have felt immense pressure from insistent clients and may have conceded to transfer in the spirit of not getting in the way of the government’s promise to the public that they are free to decide without restriction, but these advisers may later regret being so helpful if a future claim of mis-selling is made against them by the insistent client,” he told Insurance Times.

Richards continued: “The mandating of advice for DB pension transfers was a step to protect people from giving up important guarantees they might not otherwise fully appreciate and aligns with a general starting position that it will not be in most people’s best interests to transfer.”

Smith agreed, slamming the financial services sector’s approach to business: “Financial services just seems to continually not focus on doing the right things for the customer and is always out to make money; profit before service.

“That culture has been a culture for a long time and that then leads to claims, then compensation continues to rise and premiums, therefore, rise and rise. It’s been a long-standing problem.”

Smith did concede, however, that PI premium increases has spread further than just the financial services industry. “It’s everywhere,” he said. “It’s rife.”

Mitigating approach

However, can excessive PI premium increases be combatted?

For Glynne-Jones, one option may be to set up a fund, where financial advisers and clients can both contribute in order to create a compensation pool for certain scenarios. Smith, on the other hand, said the answer lies in government regulation, with some form of price capping model.

The fallout of not addressing rising PI premiums could include market consolidation, where smaller firms crumble under cost pressures and financial advisers are put out of business.

“The thing that we’d be talking about is what happens at next year’s review?” Glynne-Jones questioned. “If it went up by 500% again, we’d be out of business.”