Barry Strathearn, compliance manager at Lowes Financial Management Ltd, said he had assumed the FCA would reach some form of "half-way house" in its proposals, as it seemed "natural" that an indexation increase of some level was due since the last increase in 2010.
While the FCA confirmed it does not expect its predictions of a 140 per cent increase in PI costs to materialise, it suggested an outcome of this kind could see up to 1,000 "higher risk" personal investment firms stop providing defined benefit transfer advice under the new £350,000 award limit.
The regulator said these firms would leave the defined benefit pension transfer advice market because they would be unable to afford PI insurance cover, but did not anticipate them leaving other areas of the advice market.
Under this scenario the City watchdog predicted 1,500 "lower risk" personal investment firms would still provide DB transfer advice, a number it said was sufficient to meet demand given indications activity of this kind had already "peaked".
Mr Strathearn said: "We certainly can see a crisis upon the industry in regards to the new figures and increased costs which the regulator concedes could lead to around 1000 advice firms pulling out of the pension transfer market, while at the same time stating this will only benefit around three quarters of 500 high value complaints that would be covered by the new limit."
Mr Strathearn said he believed the compensation increase would have wider reaching issues not just limited to firms involved in the pension transfer market, although he said it would be safe to assume these advisers will "bear the brunt" of the rise.
He added: "When the FCA state their own worst case scenario shows premium increases of 140 per cent and the insurers are disagreeing and arriving at 200 per cent - 500 per cent - and this is combined with the rule change in November which is also predicted to increase premiums - it paints a very poor picture for firms who will be looking to renew their policies.
"It may not just force some firms out of the pension transfer market, it may force some firms out of business."
Pensions provider Aegon criticised the regulator's suggestion that activity in the DB transfer market had "peaked" and warned the hike in compensation could mean "bad news for the many thousands" of consumers seeking advice on whether it is in their interests to transfer out of a DB pension.
Steven Cameron, pensions director at Aegon, said: "The FCA highlights that the number of people building up defined benefit pensions is diminishing. But there are still huge numbers who have previous entitlements which they might be considering transferring, for example to access pension freedoms.