Defined Benefit 

Percival warns FCA could be heading for failure

Percival warns FCA could be heading for failure

The Financial Conduct Authority (FCA) "will have failed" if the new Financial Ombudsman Service (Fos) compensation limits drive professional indemnity (PI) insurers to leave the pension transfer market, Rory Percival has said.

In October, the FCA announced plans to increase the compensation limit for complaints to the Fos to £350,000, from its current £150,000, as part of its plans to expand the ombudsman's services to small and medium enterprises (SMEs).

FTAdviser reported at the time that PI cover could become even harder for advisers to obtain if the rise in limits goes ahead. 

Mr Percival, former FCA technical specialist, said the regulator had to have a conversation with the PI market to understand how insurers will react if the compensation limit for complaints to the Fos is increased.

He said: "They need to factor that response into the decision about what they do in terms of final rules."

Mr Percival, who was the guest speaker at Prudential's recent tour of adviser seminars around the UK, said PI was one of the topics that popped up regularly during the sessions.

He said since last year, when it introduced new rules for defined benefit (DB) transfers, the regulator has been "treading a very difficult line between bringing in regulations that protect consumers, but aren’t so heavy handed that it closes down the whole market".

Mr Percival said: "I think they tread that line very well. However, regarding the consultation on the increase of the Fos limit, they need to talk to the PI market very carefully about this."

FTAdviser reported in July that advisers performing a high volume of DB pension transfers were 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 had the full limit of PI insurance cover without any restrictions, of up to £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.

Craig Harrison, managing director of Creative Wealth Management, said "clearly access to PI coverage is a hugely important aspect in well-functioning advice market, particularly with regards to DB advice where we have seen a number of issues.

"It follows that the regulator should consider the impact of these changes on access to PI coverage before pressing ahead."