How advisers are responding to PII challenges

Insurer appetite remains cautious, while PII cover still represents a significant expense for businesses, which have to manage the capital adequacy implications of increasing excesses and potential restrictions on their policies.

Additionally, any increase – no matter how small – is still having a compounding effect on the more substantial increases seen in previous years. One adviser, Felix Milton, a chartered financial planner at Philip J Milton & Company, has seen his PII costs rise by 55 per cent in two years.

Advisers are having it tough and in the absence of any real reprieve in the immediate term, the onus is on them to make certain changes to ensure their survival.

Chris Davies, executive director at Howden Insurance Brokers, says IFAs have been concerned about whether cover would actually be available, the limitations on terms being offered by insurers and the increasing policy excess level that would be applied in the event of a successful claim – factors that cause a business to set aside additional capital to meet its regulatory resource tests.  

He adds: “When combined, these factors are potentially existential for firms. While significantly increased premiums are extremely unwelcome, they are rarely the reason firms fall into administration.”

Many of the participating insurers are supportive of the IFA sector, but there are too few to provide a healthy environment.Julian Brincat, Protean Risk

Julian Brincat, insurance broker at Protean Risk, says: "After years of significant increases we have seen some stability but it is fair to say that firms that are still involved in DB transfers and have high numbers can still find that they are experiencing increasing rates but this very much depends on the firm, how it is being presented to insurers and the renewal strategy.

"We are seeing that many firms that we work with are experiencing growth, and this is not necessarily due to any particular increase in DB transfer activity. This is a positive for the industry but it does mean that many firms are experiencing an increase in premium due to this alone, even if the rate applied does not increase.

"It also seems that the smaller firms take the brunt of the increased rates with larger firms able to access more insurers and benefitting from some economies of scale."

According to Brincat, the biggest threat to advisers' PII is the potential of any more insurers withdrawing from the market and a continued reluctance for new insurers to enter. 

“Many of the participating insurers are supportive of the IFA sector, but there are too few to provide a healthy environment,” he adds.

“The market needs more good-quality entrants with long-term ambitions to come in and provide capacity and at the same time work together to innovate the offering and help firms minimise their exposures rather than just compensate.”

Currently, there are around seven to eight standalone insurers open to new business and a few more that insure existing businesses, but are effectively closed to new business. 

Davies says there is a supply and demand imbalance, as the majority of insurers do not want to underwrite financial advisers.

“The reasons for this are: the lack of a true legal claim longstop; the increasing level of redress that can be awarded by the Fos; the FCA preparing to use its consumer redress powers under section 404 of FSMA; and a general belief that there will be regulatory ‘contagion’ from the British Steel Pension Scheme review into the wider defined benefit transfer market."

The FCA is currently consulting on a compensation scheme for BSPS members, which, if it goes ahead as initially proposed, will force advisers to pay compensation to those who received unsuitable advice to switch away.

DB transfer advice

Separately, a review of the FCA’s existing redress guidance, FG17/9, is being carried out this summer, with any changes to the guidance affecting all companies that have, or plan to purchase, a book of DB transfer advice. 

Brincat says: “Most insurers are being supportive of their clients even though they are not looking to take on any new firms with British Steel exposure. 

"Of course where insurers offer cover for a potential redress scheme there are concerns, given some of the proposed elements of the scheme, the opt-out basis for example, and the fact that the current uphold rate against the advice to transfer with the Fos is extremely high. 

“The difficulties arise where firms are not offered renewal terms or are facing increased excesses or new exclusions which expose the firm further.”

Businesses that generally have an exposure to DB transfers will be paying a higher rate than a comparable business without it, as it impacts the risk rating that underwriters attach to an IFA when assessing their submission. 

The level of due diligence firms do on their policy and provider has increased significantly.Julian Brincat, Protean Risk

Brincat says the impact of this depends on the insurer and their appetite for insuring IFAs who are involved in DB transfer advice. This would include the level of cover that they are willing to offer, for example the restrictions they have in place, limit of indemnity offered and excess structure. 

Additionally, it is on a case-by-case basis, as insurers would always assess each business based on its own merits – so they would look at numbers of transfers, processes and schemes that they are involved with, types and ages of clients and other variables to assess whether a business has undertaken this advice process in a diligent manner. 

Many businesses have historically been active in the DB transfer market, and even though they have now rescinded their permission to advise in this area there is still the potential for a claim to be made against that advice.  

Therefore, the rate currently applied to their business will still be calculated, to some degree, with reference to their previous business activities.

Due diligence 

Brincat says: “You can find two firms of a similar size and exposure in terms of numbers of DBs with very different policies due to the way and type of information presented to insurers.”

Insurers' appetite for IFA PII is more restricted than for many other professions, although a well-run business that can demonstrate strong processes and client interaction has a better chance of securing broader coverage and competitive rates, but this also depends on the insurer and the way the business is presenting itself at renewal. 

Brincat says businesses are taking the renewal process a lot more seriously and providing important additional details to their broker with more understanding and appreciation of the process. 

The Fos has excessively increased the award limit and I feel they continue to make very blinkered decisions on cases.Toni Sheen, PI Financial Sutcliffe and Co

He adds: “The level of due diligence firms do on their policy and provider has increased significantly, so we find that there are fewer firms just basing their decision on premium alone but also focusing on the policy offered and quality of insurer with a greater understanding of how the IFA PII market operates and how their policy works with them as a risk transfer tool.”

Toni Sheen, IFA pension transfer specialist and a director at PI Financial Sutcliffe and Co, says that where a member has been advised incorrectly to transfer they should be put back into the same position as they would have been if they had not transferred.

Rather than getting a cash lump sum it should be a lifetime annuity at the scheme's normal retirement age and with the same benefits, for example escalation rates, spouse pension guarantee period, she adds.

CMCs

Another big issue she says is having a knock-on effect on PII premiums is the way claims management companies operate.

Sheen says: “Unfortunately PI premiums will continue to rise [due to] the FCA handling of claims management firms and the Fos being under extreme pressure, behind in their cases and not taking a unified approach when addressing complaints. 

“The Fos has excessively increased the award limit and I feel they continue to make very blinkered decisions on cases; siding with the words from CMCs who seek to fabricate claims to suit their own business position – no win, no fee.”

In recent months the FCA has taken some action to clamp down on underhand activities by CMCs, such as phoenixing.

Claims management phoenixing occurs when individuals from financial services companies go out of business but later reappear in connection with CMCs and charge consumers for seeking compensation against their former business's poor conduct by bringing a claim to the Financial Services Compensation Scheme.

They are caught between a rock and a hard place where they can’t afford the premiums but they also can’t afford to do business uninsured.Gemma Harle, Quilter Financial Planning

The FCA says phoenixing incentivises businesses to act against their customers’ interests, and the reduced trust in financial services and CMCs is likely to damage public confidence and participation in markets.

Back in March the regulator also introduced a cap on the amount consumers can be charged when it comes to claim awards, which will depend on how much redress they are due. For example, if the redress amount is below £1,500 consumers can only be charged a maximum of 30 per cent of their claim, or £420, whichever is lower. 

The challenges around rising PII and policy terms is also driving advisers to join networks to reduce the burden and gain further support, while consolidation has increased in the IFA market.

Gemma Harle, managing director at Quilter Financial Planning, says she is seeing a number of directly authorised companies who want to join the network.

Harle adds: “This is a real problem in the industry especially for small businesses that would simply not have the cash reserves to cover costs of claims that are not covered by PI.

"They are caught between a rock and a hard place where they can’t afford the premiums but they also can’t afford to do business uninsured and risk claims that could potentially put their business under.”

Ima Jackson-Obot is deputy features editor of FTAdviser