Defined Benefit  

Advisers face £500k PI limit for pension transfers

Advisers face £500k PI limit for pension transfers

Financial advisers performing a high volume of defined benefit pension transfers are having their level of professional indemnity insurance coverage reduced to £500,000, as insurers are wary of the risks involved in this type of business.

Julian Brincat, head of IFA practice at professional indemnity insurance broker Protean Risk, said a growing number of financial advice firms are having this £500,000 limit across the life of their policy applied as "a way to avoid exclusion".

Previously, they would have the full limit of professional indemnity insurance cover without any restrictions, of £1.75m, he said.

The limit means if an adviser receives compensation claims in excess of £500,000 in relation to defined benefit pension transfer advice they will have to pick up the tab out of their own pockets once the insurer has paid out half a million pounds - or they will have to declare themselves bust and pass the bill on to the Financial Services Compensation Scheme.

FTAdviser reported last week that advisers involved in the British Steel pension transfer scandal will have to undergo an audit of their processes in order to get their professional indemnity insurance policy renewed.

However, insurers have concerns about the whole defined benefit pension transfer advice market, and are reducing their coverage of firms in this area.

Mr Brincat said: "We are heading to firms having complete exclusions on defined benefit (DB) transfers, or having these inner claim limits which only gives them relatively small limits of indemnity to cover them for DB advice."

The inner limit of £500,000 will only cover "one or two claims," he noted, and won't be useful if there is a bigger problem with the advice given by the firm or a systemic problem, he argued.

He said: "If there was anything dramatic or systemic in terms of claims coming into the industry then a lot of these firms wouldn't be able to afford the claims compensation, and that would be a massive issue on the industry itself, potentially falling in to the [Financial Services Compensation Scheme] FSCS.”

A string of failings around DB pension advice has already increased the levy paid by advisers to the FSCS by 21 per cent to £407m this year.

The Financial Conduct Authority (FCA) has been approached for comment.

The regulator has been focusing on the DB transfer advice market, and announced it will be collecting data from all financial advice firms which hold pension transfer permissions during this year.

In January, the watchdog sent a letter to all firms holding pension transfer permissions revealing the red flags the regulator will be looking for when it enters advisers' offices.

Late last year, the FCA said it would not be taking action on professional indemnity insurance after a review, because doing so would probably push premiums up even further.

Instead, it is looking at alternative ways of addressing the shortcomings of the professional indemnity insurance market, such as advisers leaving money in trust or taking out a surety bond.