Will PI woes lead to end of DB transfer market?

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. 

Key Points

• 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. 

It is possible that regulatory action and public opinion together can make it so difficult to sell a product.--Matthew Connell

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.”

Pension freedoms

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

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.

“It is possible that regulatory action and public opinion together can make it so difficult to sell a product. Although it is not officially banned, it’s just a high regulatory risk to enter that market, that it sort of disappears.”

We see PI insurers asking firms what is their proposition and their target market.--Phil Deeks

Paul Freeman, senior underwriter and assistant vice president at PI insurer Liberty Specialty Markets, says: “Liberty continues to support existing clients with DB exposure who wish to renew their PI cover; this support includes new DB advice being provided. We are not currently providing DB PI cover to new clients.  

“This enables us to manage exposure across the book of business while still being able to support our existing clients.”

Although there are insurers who are limiting the level of PII they will underwrite, others have decided to remain in the market but are now asking more probing questions.

Phil Deeks, a director within KPMG’s EMA Region Financial Services Risk and Regulatory Insight Centre says: “[Insurers are saying], ‘If we recognise that not all firms are as homogeneous as we thought, we probably need to understand each firm a bit more than we did before’. 

“So we see PI insurers asking firms what is their proposition and their target market.”

Assurance for insurance

Insurers will also be asking more questions around the types of controls that sit around advisers’ propositions, the level of assurance they have that they are doing the right thing, and the level of quality assurance checking they are doing.

This information is designed to give the insurer more granular information.

In 2018, the Pensions Advice Taskforce, an industry-wide representative body, was set up to help raise standards and enhance consumer protection in respect of complex areas of pension advice. 

Its initial focus has been on safeguarded and DB pension transfers, particularly following the British Steel debacle.

It later devised the pensions transfer gold standard – a voluntary code of good practice.

The intent is for companies to adopt and promote this standard so consumers can be confident they are dealing with a company that is going beyond minimum requirements when giving financial advice.

Mr Connell says: “Our efforts have been focused on bringing the PI insurers and advisers closer together in terms of understanding what good practice is so that PI insurers are able to identify advisers who are implementing good practice.

“We have had feedback from insurers that they value the gold standard.”

But there is still more to be done.

Mr Connell says that there are advisers with immaculate complaints records and robust compliance procedures who are seeing an increase in the cost of PII around pension transfers.

He adds: “This is a very delicate issue and the FCA has expressed an opinion that the default good advice is to not transfer and any recommendation to transfer has to overcome that initial assumption.

“So nevertheless, PI insurers are still having concerns about PII.” 

Mr Deeks says with companies undergoing a more detailed level of questioning, the insurer can more accurately reflect what that risk is. 

“Equally, at the other end of that scale, the insurer can say, ‘Based on what you have provided us with, you are unable to give us that assurance, so either we cannot provide cover or we are going to put an exclusion around your DB business’,” he adds.

We have had feedback from insurers that they value the gold standard.--Matthew Connell

This all serves to make the process of applying for PII take longer. As there is now more back and forth between the adviser and insurer, this will be leading to higher operating costs for insurers, which IFAs will see reflected in their premium.

So is there still a market for DB transfers in the future?

Mr Deeks says: “There is still a market.

“Yes, it is painful, yes the premium goes up, but they are able to secure cover. Once a PI insurer has visibility and can accurately price the risk, it continues to be a viable market.”

In a note to advisers, Julian Brincat, a director at PII broker Protean Risk, said the FCA “clearly intends” to reduce the number of IFAs giving DB advice and is using the restricted PI market to assist in clearing the decks.

He added key considerations advisers should make when facing cover exclusions include: being aware of inner limits that are becoming increasingly common in IFA PI policies, understanding restrictions, and consulting a third-party compliance consultant to clarify what the implications of any exclusions are.

Still, the fight goes on as MPs make plans to meet with advisers and regulators to try to improve advisers’ PII issues.

Ima Jackson-Obot is deputy features editor of Financial Adviser and FTAdviser