Advisers question FCA's optimism on PI issues

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Advisers question FCA's optimism on PI issues

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.

He said: “I just hope that by the time the market does soften, as the FCA predicts/hopes it does, that the amount of choice for providers isn't even smaller than it is now.”

Murray added: “It would be fantastic if insurance companies were to appreciate that the quality of advice is going up and reduce their premiums, but based on the way insurance companies typically work, I can't see PII reducing substantially in the future just because advisers are being more cautious with their advice.”

FCA expectations clarified

Despite these doubts, Steven Cameron, pensions director at Aegon, praised the guidance for making the FCA’s expectations of the DB transfer advice market “very clear”.

Cameron said: “Those firms who continue to offer advice on DB transfers will be able to use this to give themselves confidence they are fully aligned to FCA expectations. 

“Even ahead of the guidance, FCA stats were showing improving standards of suitability and we fully expect this to continue to improve across the market. Unfortunately, it may take some time for this to flow through into proportionate PI premiums.”

But he still has concerns the market will continue to shrink due to pricing in the PI market lagging behind improvements in the standard of advice.

He said: “While this guidance will provide further confidence to those firms who specialise in this market, it is unlikely to reverse the general downward trend in the supply of DB transfer advice.

"Unfortunately, this means the advice gap will only get bigger unless we see specialist firms stepping in to plug part of this gap.”

amy.austin@ft.com

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