The FCA's new pension transfer rules won't make it any easier for advisers to obtain professional indemnity (PI) cover, according to insurers.
In its 58 page-long policy statement, titled Improving the quality of pension transfer advice, the Financial Conduct Authority (FCA) announced a number of new rules for the defined benefit transfer market.
In the paper, the watchdog recognised that a wider issue in the pension transfers market is professional indemnity insurers are increasingly concerned about the levels of suitable advice in this area.
As a result, "some advice firms are withdrawing from this advice market due to difficulties in getting PI cover, the paper stated.
FTAdviser reported in July that advisers performing a high volume of 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 PI insurance cover without any restrictions, of £1.75m.
The situation is said to be leading more firms to consider phoenixing, due to fears about future liabilities arising from DB pension transfers, as well as their insurer's examination of past business written.
The watchdog argued, however, that by clarifying its expectations of advisers, "both advice firms and PI insurers should better understand how firms can deliver suitable advice".
"We expect this to improve the way the market works for consumers," the FCA's paper stated.
The FCA new rules include additional qualification requirements for pension transfer specialists, new boundaries for triage services and the requirement to provide the client with a suitability report even if the recommendation is not to transfer.
However, market specialists have warned that financial advisers performing DB transfers should continue to expect hurdles in getting their policies renewed.
Garon Anthony, partner in the litigation practice group at law firm Squire Patton Boggs, told FTAdviser that the insurance industry will probably adopt a more 'wait and see' attitude in relation to FCA’s new rules.
He said: “They may well acknowledge that the changes might lead to better qualified and more competent advisers who are therefore less risky, but my view is that insurers will want to see that playing out over a period of time, rather than being something that will affect premium pricing or coverage in the next 6 to 12 months.”
Mr Anthony is, therefore, expecting the difficulties in getting PI cover to continue.
He said: “If you look at the time frame for what was proposed last week for implementation of the new pension transfer rules, most of it isn't immediate and plays out over the next few years.”
The new qualification requirements, for example, will only come into force in October 2010.
Julian Brincat, head of IFA practice at PI insurance broker Protean Risk, argued that in the long run, “any guidance from the FCA to provide a framework for advising on pension transfers is bound to give underwriters some reassurance on advice going forward.”
Nevertheless, “it will not necessarily assist with historic advice which may not fit within these guidelines,” he said.
“This would be on the provision that they are confident that the Financial Ombudsman Service would work within these parameters,” he concluded.
Alistair Cunningham, chartered financial planner at Wingate Financial Planning, said: "The problem with the FCA’s statement is that they cannot predict the direction of travel of future changes of government not how the Financial Ombudsman Service may rule.
"It might soften the stance of some insurers, but my concern is there are still too many people that have transferred and until the dust has settled on that the market will remain hard."
maria.espadinha@ft.com
