Firms providing personal indemnity insurance (PI) are more concerned about insuring adviser firms that engage in defined benefit pension transfers on behalf of clients than those who use enterprise investment schemes (EIS).
Speaking at the EIS Conference in London this morning (26 January) Eloise Ellis, business development manager at Lark Insurance, which provides professional indemnity insurance to financial advisers, said she often heard advisers say they won’t invest in EIS or seed investment enterprise schemes (SEIS) on behalf of their clients due to concerns their insurance premiums will be affected by the higher level of risk associated with them.
But Ms Ellis said the insurance industry is far more concerned about the risk of advisers being sued for handling defined benefit pension transfers than with EIS.
EIS investments provide an up front tax break of up to 50 per cent for investors in early stage companies, with the income and capital gains also exempt from tax.
Changes announced in the budget have tightened the rules around the type of companies EIS investors can invest in, with HMRC restricting the capacity for investments in “asset backed businesses”, which would generally be regarded as lower risk.
As FTAdviser previously reported, Dermot Campbell chief executive of Kuber Ventures, an EIS platform,said up to 50 per cent of the companies invested in last year may not qualify for EIS tax breaks this year.
Richard Angus, a partner in Hardman and Co, a consultancy firm, said the rule changes mean EIS investments will now be less about lower risk “capital preservation strategies” and into “real entrepreneurial companies that are more risky.”
Ms Ellis said, in addition to pension transfers, insurance companies are worried about providing personal indemnity insurance to intermediary firms that use unregulated investment strategies for the clients.
But as EIS strategies are deemed by the regulator to be suitable for marketing to private investors, then they are not regarded as unregulated investments in the eyes of the insurance industry.
Defined benefit transfers have been a matter of concern for the Financial Conduct Authority (FCA) since pension freedoms were introduced in April 2015, with the accompanying soaring demand to move money out of DB schemes to enable people to access all of their retirement savings in one go.
In October 2017 the FCA revealed it had found advice in more than half of the cases where the recommendation was to move the retirement pot out of a defined benefit scheme was unsuitable or unclear.
The same month, research from self-invested personal pension provider Momentum Pensions found nearly two out of three specialist pension transfer advisers said their biggest concern about defined benefit business is the risk of future liabilities from advice that is contested.
Almost half of these professionals have seen an increase in insistent DB pension transfer clients over the past year, the research from the self-invested personal pension (Sipp) provider revealed.
David.Thorpe@ft.com
