Board minutes from the meeting on February 28, released yesterday (April 11), showed the board had been warned raising the Financial Ombudsman Limit from £150,000 to £350,000 could limit insurance cover available to advisers, particularly those advising on pension transfers.
The board seemed amenable to the idea the increase would lead to a smaller number of advisers operating in the defined benefit transfer space. It also believed the shift would mean the players left would provide "affordable advice".
The minutes stated: "The board was informed that in reaching this decision, the executive had considered the trade-off between the substantial benefits of a £350,000 limit for complainants and the potential for an adverse impact on the ability of personal investment firms to obtain professional indemnity insurance in future.
"It was recognised that PIFs advising on defined benefit to defined contribution pension transfers were particularly likely to be affected, as this was an area of concern to PII insurers.
"The board discussed the proposal. While noting the risks and uncertainties around the effect on the supply of advice, it accepted the executive’s view that it could result in a more focused market with a smaller professional group providing affordable advice.
"The board approved the final rules as consulted on in CP18/31."
The changes to the Fos limit took effect on April 1 after a two-month consultation in which the regulator was warned by insurers that a worst-case scenario could see defined benefit PI insurance premiums jump by 500 per cent and see scores of insurers leave the market.
In its own "worst-case" scenario the FCA predicted a 140 per cent rise in PI premiums, which could see up to 1,000 "higher risk" personal investment firms stop providing DB transfer advice.
Shortly before the changes were made FTAdviser heard from the first advisers whose insurers were not prepared to cover the full amount, though it is understood some insurers have since adapted to the new limits.
There have also been tales of premiums going up as much as tenfold and exclusions and restrictions intensifying.
Alistair Cunningham, financial planning director at Wingate Financial Planning, said: "I am not clear on the reasons for the change, but it seems clear that a number of individuals have been affected detrimentally due to the historically lower limit. Almost universally the examples I have seen have been around DB transfers, where the scope for harm is greatest.
"Of course historically the most upheld complaints have been with the larger firms, with deeper pockets, who not only can more likely afford the higher limit, but are more likely to have claims in that space.
"But the negative impact on firms like ours, who clearly are very unlikely to ever have such awards, are those small firms who have committed misselling offences of an industrial scale who fail and ultimately need bailing out by the FSCS."
He added: "I know some firms have the increase excluded, and of course those that don’t have sufficient cover will see their capital adequacy requirements increase. It’s going to be a problem for some, especially those who already have restrictions due to the volume of DB transfer business they’ve done."
Paul Stocks, financial services director at Dobson & Hodge said he struggled to see how a smaller adviser market would bring DB transfer costs down.
He said: "Given the increased potential liability, the cost of professional indemnity insurance will no doubt increase and whilst it’s important advice is appropriate, we need to ensure that ‘good advisers’ aren’t squeezed out of the market.
"I therefore struggle to see how the outcome could be more affordable advice if the cost of running a business increases and the supply of advice is lowered."
carmen.reichman@ft.com
