The City watchdog is hopeful its finalised guidance on what processes advisers should have in place to deliver suitable defined benefit transfer advice will in turn drive down professional indemnity costs.
The Financial Conduct Authority published its finalised DB transfer guidance for advisers this morning (March 30) to help firms identify weaknesses in their existing advice processes in a move to drive up standards in the market.
In a feedback statement, which set out issues advisers had with the guidance and the FCA’s response, advisers raised concerns about the current state of the PII market.
Advisers said the FCA had “underestimated the challenge” faced by firms to get cover in the current market and that these challenges would widen the advice gap for consumers.
But the FCA is hopeful that if advisers are able to improve the quality of advice on DB transfers then this will ultimately lead to lower PII costs.
The FCA stated: “While there is clear evidence that the PII market in relation to DB transfer activities is hardening, we consider that the ultimate root cause is the quality of advice given.
“We hope that, going forward, firms can demonstrate higher rates of suitable advice and that this guidance can help the market in achieving good advice on a consistent basis. This should eventually be reflected in the PII rates that are charged.”
Rocketing insurance premiums and a lack of available cover, alongside an increasing FSCS levy, have driven many advisers to consider their long-term future in the industry and whether they can continue to advise in this market.
The PI market was also hardened as a result of the FCA increasing the compensation limit of the Financial Ombudsman Service from £150,000 to £350,000 back in April 2019.
In November that year Debbie Gupta, director of life insurance and financial advice at the FCA, said she appreciated the matter of PI insurance was one which was "very, very live" in the sector.
At the time, she said that the FCA's position was that PII is in place to protect both firms and consumers and they must serve the purpose for which they are needed.
She said: "Appropriate cover should not exclude relevant lines of business, such as defined benefit transfers. It should not include sub-limits, meaning that the cover falls below the minimum requirements and for example where financial advisers are IDD firms the minimum requirement is €1.85m (£1.57m).
"And it should not include excesses at such a level that would essentially render the cover materially ineffective.
"So simply put, a firm must at all times be able to meet its liabilities as they fall due."
On the back of advisers’ concerns, the FCA today updated its finalised guidance to clarify the risk posed by accepting cover which is subject to sub-limits.
According to the FCA, sub-limits risk unreasonably limiting the cover under the firms’ PII policies, for example meaning they do not provide for the minimum limits of indemnity in the rules.
Other changes
Today’s finalised guidance is largely the same as the draft guidance which was published in June 2020 alongside the regulator’s final rules for DB transfer advice, which saw the banning of contingent charging and the introduction of abridged advice.
As the finalised guidance is based on existing rules, it comes into effect immediately.
Changes made to the guidance as a result of adviser feedback included clarification on how to use estimated transfer values when carrying out abridged advice.
Further examples of good and poor practice were also added in a number of areas, including charges disclosure, abridged advice and appropriate pension transfer advice.
In its guidance the regulator provided a number of examples across topics such as managing conflicts of interest, the use of introducers and charging structure disclosure.
For example, under the section looking at conflicts of interest, the FCA warned firms should be particularly aware of and manage conflicts of interest where the firm’s interest in the outcome of a service provided to the client is separate from the client’s interest in that outcome.
As an example of good practice the regulator looked at a firm that operated a centralised investment proposition, which meant it would profit from ongoing advice charges and easier administration if it recommended a transfer and its CIP solution.
To demonstrate that it managed this conflict of interest the firm would disqualify the pension transfer specialist if its pre-sale business review function identified that a transfer and investment into the CIP had been recommended when it would not be suitable.
The regulator has also teamed up with the Pensions Regulator to update separate guidance on what employers and trustees can do to help their members understand their options without straying into financial advice.
Earlier this year, data from the FCA showed that the number of active firms in the pension transfer market had declined from 2,426 firms in 2015/18 to 1,310 firms in 2018/20.
But there were 103 (6 per cent) new entrants to the market. Overall, the regulator said there were currently 1,521 firms with DB transfer advice permissions.
The FCA said the reduction in firms could be as a result of not having adequate professional indemnity insurance for this form of advice, while other firms have given up their permissions as they had not used it for an extended period.
amy.austin@ft.com
What do you think about the issues raised by this story? Email us on FTAletters@ft.com to let us know
