New Fos award could drive up adviser PI cost

New Fos award could drive up adviser PI cost

Professional indemnity cover could become even harder for advisers to obtain if the Financial Conduct Authority's plans to raise the Financial Ombudsman Service's limit go ahead, commentators have warned.

Last week the FCA announced plans to increase the compensation limit for complaints to the Fos to £350,000, from its current £150,000, as part of its plans to expand the ombudsman's services to small and medium enterprises (SMEs).

But there are concerns the increase will lead to professional indemnity premiums going up and risk pushing more insurers out of the market.

The FCA has already raised concerns the PI market is too small, with between 10 and 15 firms actively providing this cover. This makes it vulnerable to fluctuations in market conditions such as interest rate changes and equity market volatility.

The effects of increasing the Fos compensation limit could also intensify the problems faced by advisers operating in the defined benefit (DB) transfer market, where some have faced difficulty getting their cover renewed and others saw their level of coverage reduced to £500,000.

Julian Brincat, head of IFA practice at Protean Risk, said: "We know that there has been some dialogue on the impact of this increased limit between the regulator and PI insurers but it is clear that an already hard market could get harder and it is likely to be the smaller firms that feel the brunt again.

"There is not a large selection of active insurers left in the market so any further withdrawals will significantly impact availability of cover. The current insurers have been supportive of the IFA sector but this will do little to encourage them and in particular the increased cap will add to current concerns surrounding coverage for DB transfers which is already a challenge for many firms."

Keith Richards, chief executive of the Personal Finance Society, questioned how the FCA could take steps which would harden the PI market while at the same time seeking to increase access to financial advice.

He said: "The FCA’s proposed changes to the Fos compensation limit throws into stark question whether there is any joined up thinking between them, government and the market.

"The recent concerns surrounding DB transfers which sent PI Insurers initially running for the hills, has already left many advisers facing increased premiums, increased excesses and in some instances, no ongoing cover.

"The market continues to harden with increased costs being experienced across the sector and this latest move by the FCA will serve to compound the issue and can only be described as reckless."

The FCA has been approached by Financial Adviser but did not respond in time for publication.

But in its paper Increasing the award of the Financial Ombudsman Service out last week (18 October) the regulator said it was aware PI premiums may increase as a result of the compensation limit going up and acknowledged that for some small firms they are already "relatively high" as a proportion of total income, meaning further increases could have a "significant effect" on them.