Advisers have questioned the regulator's optimism with regards to the future of professional indemnity insurance for advisers, saying guidance on defined benefit transfers is unlikely to solve the industry's problems.
The Financial Conduct Authority said in yesterday's (March 30) finalised guidance on defined benefit transfers that if advisers are able to improve the quality of advice on DB transfers this will ultimately lead to lower PII costs.
It came in response to adviser criticism saying the FCA had “underestimated the challenge” faced by firms to get cover in the current market.
The FCA stated: “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.”
But the industry agrees this is unlikely to materialise.
The main reason is that many of the issues skewing the PI market centre on historic advice, which will always have a place in backward looking insurance.
Keith Richards, chief executive officer of the Personal Finance Society, said: “PI insurance is made on a ‘claims made’ basis, and because complaints about advice often take years to come through, much of the advice that is covered by a PI policy may have taken place years earlier, before the FCA increased the limit for FOS complaints, before hard market in PI insurance began and before detailed FCA guidance was published.
“As a result the impact will continue to be felt in both increased cost and risk exposure for firms and their clients.”
Alistair Cunningham, financial planning director at Wingate Financial Planning, said this problem not only affects current advisers but new ones as well.
He said: “New entrants, without the ‘baggage’ will struggle, and it’s only the firms who have been offering high quality advice over the very long-term will find it possible to operate in this area.”
Similarly, Simon Harrington, senior policy adviser of public policy at trade body Pimfa, said: “The publication of this guidance isn’t going to change the willingness of insurers to underwrite a market where they consider there is more potential for redress than they could reasonably charge by way of premiums.
“Our own view is that there has been a substantial hardening over the PI market – not just in financial advice but across a number of professions – for some time now.
“Whilst this guidance is welcome, it certainly won’t ‘fix’ the DB market, nor will it encourage liquidity and providers to re-enter the market in the short to medium term.”
Richards agreed that PI issues were prevalent in many markets, including architects, solicitors and other professionals within financial services.
Meanwhile, Dominic James Murray, independent financial adviser at Cameron James, said even if insurers softened the PI market after seeing several years of high quality advice, there may not be many advisers left operating in this space.