Former pensions minister Sir Steve Webb is calling on the government to intervene in the professional indemnity (PI) insurance market, after some financial advisers have been struggling to get cover.
Speaking at The Great Pensions Debate in Port Talbot yesterday (10 July), the director of policy at Royal London said PI was not currently on ministers’ radar, but it should be.
He said: “The [ministers] would regard that as something to do with businesses, it's a commercial market, what does that have to do with government.
“It seems to me that if the PI market crumbles, we're all stuffed basically. If you’re a minister who wants good outcomes for consumers, good quality advisers not being able to get insurance for what they do isn't a great place to be.
“I want to see ministers, regulators, getting much more involved to try and make sure that people that are doing the job properly can get affordable insurance. That has to be the right answer.”
FTAdviser reported recently that advisers performing a high volume of defined benefit (DB) pension transfers are having their level of PI insurance coverage reduced to £500,000, as insurers are wary of the risks involved in this type of business.
Previously, they would have the full limit of professional indemnity insurance cover without any restrictions, of £1.75m.
PI insurers are also asking advisers involved in the British Steel pension transfer scandal to undergo an audit of their processes in order to get their policy renewed.
In May it emerged one pension transfer specialist was forced to close down after it was unable to find PI cover at “commercially acceptable” terms.
The Personal Finance Society has also written to the Treasury to urge an overhaul of the PI system, including the establishment of a central levy, which would combine Financial Services Compensation Scheme (FSCS) funding with PI cover.
Keith Richards, the PFS chief executive, told FTAdviser at the Great Pensions Debate: “The current structure of mandatory PI was designed and implemented at a very different point in time, and the dynamics and the market has evolved dictate that it is now less fit for purpose.
“What we are really proposing to the government is that we look at the whole value of the retail investment pool to take a very small percentage, which will contribute to the funding of the FSCS, consumer protection as well as providing sufficient funds for consumer education.”
In practice, the current demand for mandatory PI insurance would be replaced by an additional levy, which would “create certainty and stability,” Mr Richards argued.
He added: “The advice community would still need to pay a levy, as a contribution, but most of the costs of the levy would come from the consumer retail funds, which is a far more transparent way to do it.”
Sir Steve (pictured) disclosed preliminary findings of Royal London’s financial adviser research, which showed almost half (42 per cent) of the 400 surveyed professionals were able to renew their PI policy on similar terms to before once they had had a proper dialogue with the insurer.
A mere 5 per cent of respondents weren’t able to renew their policy, with 24 per cent of advisers saying their insurance wasn't up for renewal yet, but they were worried.
The remaining 29 per cent of respondents were able to renew their policy, but on worse terms than in previous years, Sir Steve said.
The Financial Conduct Authority (FCA) has also recognised the “risk of PI insurers withdrawing from the market for DB pension transfer advice”.
It said previously: "We are reviewing the situation as part of our work on the funding of the [Financial Services Compensation Scheme] FSCS but it must be clear that if firms want to do this business, they must have either suitable PII or their own resources.”
Martin Bamford, chartered financial planner at Surrey-based Informed Choice, agreed the inability to renew PI insurance was a growing and real threat to IFA businesses.
He said: “It's already a small market and the growing risk of DB transfer claims is likely to push up premiums and lead to higher excesses, which has implications for capital adequacy too.
“Small firms who are unable to get compliant PI insurance, or renewal their premiums at an affordable premium, face tough decisions about the future of their businesses.”
maria.espadinha@ft.com
