Advisers told they can only do set numbers of DB transfers

Advisers told they can only do set numbers of DB transfers

Professional indemnity insurance providers are placing restrictions on the volume of pension transfer business they will allow small advice companies to carry out.

These restrictions typically involve an advice company being told it can only do a fixed number of defined benefit transfers in a given year and, if the adviser wishes to exceed this number, they must contact the insurer and either see their premiums rise or simply be told they cannot do the transfer.

Julian Brincat, a PII broker at Protean Risk in London, said: “Since the British Steel pension crisis happened in 2017, the biggest change in the market has been that some insurers just don’t want to cover advisers who do defined benefit pension transfers at all, but we are seeing an increase in the number of firms who are putting restrictions on as well.”

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Mr Brincat said the number of transfers a firm can do will typically be calculated based on the average size of the transfers an adviser typically carries out.

He said two insurers in the market had always had rules restricting the number of transfers, but he had noticed more embracing this practice, particularly since the Financial Ombudsman Service increased the compensation limit for unsuitable advice, to £350,000 from £150,000. 

He said it was a “possible outcome” of the new insurance rules that DB pension transfers will only be carried out by very large firms.

Minesh Patel, an adviser at EA Financial Solutions in London, said the new rules meant that having performed about 10 transfers a year, in 2019 he was only allowed to do between three and five such transactions.

Richard Romer Lee, founder of consultancy firm Square Mile Research, said one his company’s adviser clients has been told the excess on their PII would rise from £5,000 to £50,000 as they carry out DB transfers.

In the minutes of the FCA's board meeting from February 28, the regular backed the notion that increasing the Fos compensation limit would lead to a more “focused” advice market.

Mr Patel said he interpreted this as meaning the regulator was keen for small firms such as his to exit the DB transfer market.

He said: “The insurers have been reducing in bulk the amount of insurance they will provide for small firms that carry out defined benefit pension transfer business.

“And if you want to do more, the excess is very high, and the amount of capital you have to keep for the capital adequacy rules means it is the smaller firms that get hit.”

In a policy paper published in March, the FCA stated that PII premium increases may cause higher-risk companies to stop providing DB transfer advice. But it added that lower-risk companies would continue to be active in this market and that "the remaining number of firms would be sufficient to ensure competitive outcomes for consumers".

Last year the FCA revealed cash transferred out from DB schemes to defined contribution plans more than doubled in 2017 – rom £7.9bn to £20.8bn.