Tampering with professional indemnity insurance for firms providing defined benefit transfers would risk cutting off access to advice, a Financial Conduct Authority executive has warned.
David Geale, director of policy, was speaking at the Personal Finance Society Festival of Financial Planning in Birmingham today (8 November).
He was asked about the impact on PI insurance premiums of those firms which offer DB transfers.
Mr Geale said there was a balance to be struck in the role of PI insurance.
He said: “We find through looking at PI insurance that providers don’t tend to price risk on an individual basis for smaller firms.
“[But] if we go in and say ‘you cannot get cover’ then we cut off a lot of people from advice.”
Defined benefit transfers are deemed by many advisers, and the regulator, as a high risk area, where clients are in danger of receiving life-changing and irreversible poor advice, and where advisers could be exposed to very costly complaints and demands for compensation in the future.
Several of the larger pension transfer specialists have faced increased scrutiny from the FCA in recent months, as well as having their regulatory permissions changed to limit the amount of pension transfer business they can do while the watchdog investigates the health of the market.
All advice firms are required to have PI insurance in order to trade. But in the event of claims an excess of around £15,000 is not unusual, which advisers must pay before their insurance kicks in.
For many advice firms, a few such complaints would forced them into default, where they are unable to pay the liabilities generated by claims for redress upheld by the Financial Ombudsman Service, for example.
Mr Geale also said he said he could not guarantee that advisers would never be hit with additional regulatory bills as they have been in the past to cover the cost of remedying bad behaviour in the advice sector.
He was addressing the FCA’s recent proposals for how the Financial Services Compensation Scheme (FSCS) should be funded, which include requiring providing to contribute 25 per cent towards the costs of intermediary funding.
He said that during its consultations on this issue, the FCA had found the financial services sector felt the FSCS was a good thing.
Mr Geale said the issue was one of fairness.
“There is going to be a bill that comes from the FSCS so when it comes, how should it most fairly be allocated?
“Will we be able to get to a point where we will never have an additional levy? I cannot promise you that because events happen.
“Will advisers pay less? If the bill is the same, then advisers will pay less because providers will be paying 25 per cent from the first pound.”
Mr Geale also said the FCA was not aiming to create a financial advice market which is “homogeneous” but was looking to encourage several different types of advice.