Defined BenefitJul 11 2019

Insistent clients and DB transfers

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Insistent clients and DB transfers

When it comes to DB pension transfers, insistent clients pose a potential danger to both themselves and their advisers.

If the client goes ahead with their own course of action, with the firm having executed the client’s request, despite advice to the contrary, the outcome may be far from satisfactory.

This can lead to the client raising a claim against the adviser.

As financial adviser Nick McBreen, of Worldwide Financial Planning, observes: “Given today’s blame culture, this could come back and bite you.”

He adds: “It introduces an additional level of risk, so avoid the risk.”  

There are many reasons why the problems can arise in the first place, such as lack of understanding on the insistent client’s part, before they consult a financial adviser.

We had our PI review recently and advising insistent clients is now a specific exclusion.Scott Gallacher

Mr McBreen points out: “They should speak to their HR department first and ask what resources are available for them to understand what’s involved, but there seems to be little information available.” 

He also believes that insistent clients may have misconceptions, which can lead to problems.

“The average person looking at going ahead with a DB transfer is venturing into dangerous territory. Do they really understand the risk of forsaking a DB scheme for something that looks sexier?” he asks.

“Perhaps it’s a matter of fear of missing out – which they could perhaps better apply to other areas of their investments.”

However, if the worst comes to the worst, and an insistent client does decide to make a claim against their financial adviser, regardless of information provided, the adviser may not be able to rely on professional indemnity insurance to protect them.

The recent changes to compensation levels awarded by the Financial Ombudsman Service have had a knock-on effect on advisers’ ability to safeguard themselves.

In a tight corner

The raising of Fos compensation limits has, unsurprisingly, given insurers pause for thought, resulting in exclusions and restrictions on PI policies.

Mr McBreen says: “Someone always has to pick up the tab – the more people who ‘jump on’ claims, the more it will have a knock-on effect on others.”

Some advisers have already felt the impact, including Scott Gallacher, director and chartered financial planner at Rowley Turton, who reports: “We had our PI review recently and advising insistent clients is now a specific exclusion.”

Reflecting on the increased compensation levels offered by Fos, Mr Gallacher says: “Fos has shifted its stance over time from being an independent reviewer, to being a consumer champion.”

While other advisers have not seen a tangible change so far, they anticipate turbulence ahead, as Paula Steele, managing partner at John Lamb Financial Planning, observes: “When the Fos limit went up on April 1, our insurers said they wouldn’t impose a mid-term premium hike, but I’m pretty sure premiums will rise.”

And this is not a case of a few insurers taking a firm stance and affecting a few financial advisers.

A recent freedom of information request from FTAdviser sent to the FCA revealed that 263 advisers had told the FCA that their PI cover for claims was non-compliant after the ombudsman raised the compensation limit.

The seriousness of the matter has reached the point where, due to advisers seeing more restrictions and exclusions applied to their cover, the Personal Finance Society has called on the FCA to carry out an in-depth analysis of the PI insurance market.

The insurance forecast

Reflecting on the current PI situation for financial advisers, of exclusions and rate increases, broker, Rhiannon Bates, managing director of The Risk Factor in Harrogate, cannot offer comfort.

She explains: “The trend is likely to continue. We expect to see more insurers follow suit on exclusions.

“From an insurer’s point of view the potential financial consequences of these cases has increased significantly and they have to be realistic about the scale of potential losses; which also means looking at the trends of the Fos decisions.”

The danger is the potential for insurers to take a short-term profit, but then collapse when the claims come home to roost.Rhiannon Bates

Ms Bates also believes costs will rise: “Those who continue to offer the cover will perhaps require significant policy excesses on insistent client activity to entertain providing the cover − and, of course, premium increases to reflect the increased risk.”

She adds: “Brokers often joke that the risk an insurer wants to write is a ‘sprinklered swimming pool’ – a ‘non-risky’ risk. That may be an exaggeration, but they do like to see a risk mitigated in frequency and severity as much as possible. 

“The maximum severity of these risks just jumped from £150,000 to £350,000 per case. Of course, most won’t reach these levels, but a proportionate increase in lower-value claims is expected.”

She continues: “And what about frequency? The increased numbers involved might encourage more people to complain, but I don’t think that is a major factor for insurers.

“What I think has their actuaries struggling is that it is hard to predict. They will often assume a worst-case scenario where predictability and analysis fails them.”

There could be some light at the end of the tunnel, but there is a risk attached here too, as Ms Bates explains: “As with all high-risk areas of general insurance there is the potential for someone to see a gap in the market and write business that others will be shaking their heads at.

“It can be very attractive to see a low-price, wide cover, ‘knight-in-shining-armour’ appear in difficult times. The danger is the potential for insurers to take a short-term profit, but then collapse when the claims come home to roost.”

Fiona Nicolson is a freelance journalist