James Coney  

Access to advice limited by prohibitive costs

James Coney

James Coney

Lorry drivers have been responsible for some pretty terrible incidents. 

I can think of truckers that have caused mass pile-ups because they have been texting or watching movies on their phone while driving, or because they have been too tired.

There have been ones that have contributed to the deaths of dozens of migrants by transporting them in trucks, and there are those that are simply dangerous.

Imagine what would happen if, when one of these horrible events happened, every other lorry driver in the country was asked to foot the bill for the compensation.

Pretty quickly, lorry drivers’ insurance premiums would shoot up. It would be passed on to customers and companies would stop using lorries.

Fortunately, lorry driver insurance does not work in this way. The insurance cost is not based on the worst scenario, but on the average. And most lorry drivers are pretty good at their job.

Unfortunately, personal indemnity cover does not seem to work like this. Rather, it seems to be priced on the basis that every financial adviser has the same risk of mis-selling as the very worst ones.

And guess what? As a result, the cost of this extra insurance is passed onto the consumers. So advice gets more expensive and fewer people can afford it.

This in turn drives those who need help into the arms of the sharks and introducers who will unscrupulously move clients’ money anywhere, just for the fee.

What a crazy situation.

When the Financial Conduct Authority launched its crackdown on pension transfers, which led to the ban on contingent fees, its solution was to come up with a simplified advice model.

This seems practical on paper, but in reality the PI cover that companies are going to need to provide something simple means it will not be simple at all.

As a result, estimates I have seen from the industry suggest the very cheapest simplified advice for a defined benefit pension transfer will be around £4,000. My hunch is that the most consumers would be willing to pay is around £500.

One of the immediate reactions to the contingent charging crackdown was from advisers, who spoke about how it was going to stop some consumers from getting advice.

I suspect that is true. 

I also suspect the FCA knows it and does not care. It is working from the assumption that in most cases DB transfers should not happen.

On that basis, people put off because of the cost of advice could act as a very effective brake on transfers. If it means fewer people do it, then it is just market forces at work.

What it may miss though is the incredibly destructive force the cost of PI cover is having on the availability of advice.

The market for financial advice should not be dictated by the cost of insurance; too many people are being deprived of access to help because of the behaviour of a few underwriters and regulators need to find a more effective way of controlling the risks.