FCA writes to PI insurers to calm market fears

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FCA writes to PI insurers to calm market fears

The Financial Conduct Authority has written to professional indemnity insurers in a bid to reassure them the recent rise of the ombudsman's compensation limit will not negatively affect the majority of their adviser clients.

On April 1 the Financial Ombudsman Service's award limit rose from £150,000 to £350,000 sending shivers through the market as insurers responded by raising premiums and excesses, particularly in relation to defined benefit transfer advice.

As a result advisers up and down the country have been struggling to obtain PI insurance, with one adviser claiming his premium had risen from £6,700 last year to £27,000 following the award limit increase.

Another adviser told the Personal Finance Society he had seen his PI insurer impose a three-case limit on defined benefit transfer advice given by his company. The cost of lifting this limit would see his premium increase from 3 per cent to 5 per cent of turnover and excess levels raised from £20,000 to £25,000 on defined benefit transfer cases.

Yet another had seen his PI premium increase from £5,800 last year to £14,050 this year, with the excess on defined benefit transfers increasing from £5,000 in 2017 to £20,000.

According to the PFS, the effect of this has already been felt as advisers have been pushed to pass on the cost to clients in the form of higher fees, as others left the pension transfer market, which in turn was restricting access to advice. 

In the weeks following the increased award limit insurers called on the financial regulator to provide further clarification of the changes, seemingly reluctant to make any major moves without additional information on the potential ramifications. 

It has now emerged the FCA last month sent a letter to insurers in which Nisha Arora, director of consumer and retail policy, said the regulator wanted to address the issues raised regarding the ombudsman's approach to dealing with complaints. 

Ms Arora told insurers only a "small minority" of cases would involve issues which qualify for the higher award limit and even fewer of these would involve potential awards over the previous compensation limit.

She also assured the market that the Fos had introduced additional quality controls to ensure consistency, include a requirement for ombudsmen to report all cases where the potential award for compensation is more than the previous limit of £150,000 to the service's legal team and their senior manager. 

The Fos believes this requirement will ensure all "relevant sources of information and relevant points of law" have been addressed and complaints considered in a "consistent" way. 

The regulator did not attempt to interfere with insurers' commercial decisions but Ms Arora said she hoped the FCA's latest correspondence would "improve" PI insurers' understanding of the "potential distribution" of high value compensation awards.

At the same time she warned the letter did not bind the Fos and was merely an indication of how it might consider cases. 

Ms Arora also said the regulator would be able to publicly share more detailed information about its work in the defined benefit transfer advice market in the coming months. 

But Scott Gallacher, a chartered financial planner at Rowley Turton, did not think the FCA's letter would change the way PI insurers operate at the moment.

He said: "Whilst any help from the FCA is clearly to be welcomed, I think it would be naive to assume that the PI insurers don’t understand how the increase to the Fos compensation limit will affect claims.

"PI insurers' sole business is assessing and insuring risk; consequently they cannot afford to get this wrong.

"Therefore, I wouldn’t expect their knowledge on historic claims history, and their view on potential future claims, to be swayed too much by an FCA letter."

The letter was also sent to a number of industry bodies, including the Personal Finance Society, the Personal Investment Management and Financial Advice Association and the Association of British Insurers, with the regulator stating it wanted the "widest possible audience" to be aware of the information. 

Keith Richards, chief executive at the Personal Finance Society, said he hoped it would help mitigate some of the concerns PI insurers may have but thought it had come too late.

He said: "The FCA’s calming letter is welcome but unfortunately is reactive to an unintended consequence which was predictable and is likely to have wider implications for pension freedoms, the public and the advice profession more broadly.

"From my perspective, the horse has already bolted and the increased cost on regulated advice is likely to have wider implications in the long term for the public and conflicts with the honourable objectives of the Financial Advice Market Review."

Mr Richards said the PFS will continue discussions with the FCA and Treasury in the coming weeks, championing member experiences to highlight the "growing risk exposure of small firms resulting from high PI excesses and exclusions". 

rachel.addison@ft.com

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