When it comes to giving defined benefit transfer advice, advisers in this space may, understandably, feel they have a target on their back – a situation made worse as they struggle to get affordable professional indemnity insurance.
In recent times, the Financial Conduct Authority has repeatedly raised concerns about DB transfers, which has in part made insurers nervous about providing PII to advisers that carry out such transfers.
Some insurers have all but exited the market, while in other cases the premium has become very expensive.
Last month, it was reported the FCA had warned almost 80 per cent (1,841 advisers) of intermediaries who arrange DB transfers about the potential harm in their transfer advice, while the difficulties of obtaining insurance has forced 30 companies to leave the DB transfer market.
So what now for advisers seeking PI?
The FCA’s recent portfolio strategy letter highlighting its concerns has added more pressure to an already strained market. The regulator said it was concerned some advisers are holding inadequate financial resources and/or PII for the activities they carry out.
- The market for PI cover for DB transfer has become very challenging
- The FCA has stepped in regarding suitable advice
- PI insurers need to understand and price the risk more
It has seen cases where companies have exclusions for particular business lines, such as providing advice on DB transfers, or have sub-limits on particular business lines below the minimum requirements; for example, less than the €1.85m (£1.55m) for Insurance Distribution Directive companies.
Some companies have excesses on claims that are at such a level as to render the cover materially ineffective.
In those circumstances, the exclusion/excess or sub-limits unreasonably limit cover and do not comply with its rules.
In what can be seen as a warning shot, the FCA added: “We will be focusing on whether advisers have adequate financial resources and PII as part of our ongoing supervisory work.
“This will include the steps firms’ senior management have taken to maintain valid PII.”
If we go back in time to 2015, pension freedom reforms were highly lauded for enabling people to take control of their pensions.
But as more freedom has brought unintended consequences, this has caused the regulator – whose primary objective is to prevent consumer detriment – to step in.
This has led not just to insurer concerns, but a wider awareness in the public’s consciousness about the risks surrounding DB transfers.
DB market transfers
|Reporting year||Number of Transfers||Value of transfers|
Sources: 2017/18 and 2018/19 figures confirmed in new FOI supplied to Royal London. 2016/17 volume figure from FOI on TPR website. Value figure for 2016/17 estimated on basis of average transfer value of approx. £150k across 2017/18 and 2018/19 data.
Matthew Connell, director of policy and public affairs at the Chartered Insurance Institute, says: “There have been other products in the past which have not overtly been banned, but have carried such a high regulatory risk that people have moved away from them.
“Payment protection insurance or mortgage endowments [were such products] where expert opinion as well as public opinion decided those products were not good value and should not be on the market.