Advice firms that phoenix may be refused professional indemnity insurance cover (PI) if they are found to be purposefully avoiding their liabilities in relation to pension transfers, insurance professionals have said.
The advice market has been facing increased difficulty getting PI cover, with firms that have given advice on defined benefit (DB) pension transfers becoming subject to greater PI premiums and having their cover limits capped.
Firms previously able to get PI cover without restriction of about £1.75m are now being faced with a cover limit of £500,000.
The situation is said to be leading more firms to consider phoenixing, due to fears about future liabilities arising from defined benefit pension transfers, as well as their insurer's examination of past business written.
Phoenixing allows a firm's directors to leave their potential liabilities behind by winding down their firm and starting afresh.
These liabilities are then passed on to the Financial Services Compensation Scheme, which is paid for by the industry, and pays out in the event of a valid claim against a defaulted firm.
But Lee Chapman, director of professional risks at PIB Insurance, warned advisers who are found to be trying to "negate their liabilities" could be refused cover.
He said: "Phoenixing is not illegal but the FCA are clamping down on firms who do this.
"Insurers review any new application on its own merits and if the principals have a history of phoenixing firms, insurers may choose not to offer terms or they could be extremely punitive."
Other insurers were more lenient in their views but warned advisers looking for cover may be required to submit more extensive material about their past business, including client suitability reports.
Julian Brincat, head of IFA practice at Protean Risk, said: "Although there are some insurers who would not consider underwriting a phoenixed firm there are those that would and depending on the information provided they would not necessarily face a higher than normal rate just because it is a phoenix.
"Underwriters do however ask why a previous firm has been closed and the reasons surrounding this and so this could still impact the potential of achieving terms going forward.
"There are several factors which are taken into consideration by underwriters and it is vital that any firm that is looking for coverage be well prepared to provide detailed information, including lists, processes and examples of suitability reports to support their submission."
Some insurers may have concerns about what happens to a firm's liabilities should the firm choose to phoenix again, said Damian McPhun, partner at Beale and Company Solicitors.
He said: "From an insurer's perspective, if a firm is brand new and is carrying no liabilities from the previous business and no other legacy issues, then it would have no issue in providing cover.
"But insurers might think twice about offering insurance if it fears that it will be dumped with liabilities, should the firm choose to phoenix again."
Martin Bamford, financial planner at Informed Choice, said: "Phoenixing represents a huge financial burden on responsible adviser firms, who shoulder the costs through higher FSCS levies.
"I would like to see the professional bodies take a tougher stance when it comes to advisers involved in phoenixing, preventing them from getting a Statement of Professional Standing if their prior commercial decisions have caused a financial burden on peers through the FSCS.
"With the PI insurance market getting increasingly tough for firms involved in DB transfers, and a looming FCA review of the market, firms will be worrying about their liabilities."
rosie.quigley@ft.com
