CISI warns FCA of consequences from Fos limit hike

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CISI warns FCA of consequences from Fos limit hike

The Chartered Institute for Securities & Investment has asked the FCA for urgent clarification on the issues surrounding the Fos compensation limit hike for its members who are ‘alarmed’ at the latest developments.

The Financial Conduct Authority increased the Financial Ombudsman Scheme’s compensation limit from £150,000 to £350,000 on April 1, despite insurers forecasting this could push up professional indemnity insurance premiums for advisers by a considerable amount.

In a letter to the FCA’s CEO Andrew Bailey, Simon Culhane, CEO at the CISI, warned the rise in indemnity insurance was damaging its smaller adviser members as honest firms are forced to shoulder the cost of misconduct by others.

He also requested the FCA provide urgent guidance for its financial planning and wealth manager members who may be particularly hit by higher PI premiums.

Mr Culhane wrote: "As a result of the rise in the Fos compensation limit, almost every firm is faced with an increased premium, some considerably more, and our members, particularly the financial planning firms and smaller wealth management firms, are alarmed at the potential ramifications.

"It would be helpful to receive clarification of the implementation issues faced by both the advisory firms and the PI insurers and to understand what steps and guidance can be given to all affected to ensure that advisory firms can continue to trade efficiently and cost effectively."

He added: "The short notice given to advisory firms and the lack of wider consultation about the potential impact of this rise means that there may be serious unintended consequences as a result."

While Mr Culhane acknowledged the importance of ensuring adequate consumer protection, he added that professional indemnity insurers were already facing a tough market, with the April Fos increase serving to harden the market further by potentially reducing the number of insurance providers and increasing costs significantly for advisory firms.

He wrote: "We are receiving reports that premiums are more than doubling.

"Our members, many of whom have satisfied the Institute’s criteria for their firms to be accredited, are concerned that it is the honest and trustworthy organisations who are forced to shoulder further costs in reaction to misconduct by others."

PI insurers predicted the price of premiums for defined benefit pension transfer specialists could increase between 200 and 500 per cent after the limit hike.

The regulator itself estimated a price hike of 140 per cent, which would see the median PII premium for a firm with two to five advisers increase from £3,400 to £8,000, it stated.

Under a 500 per cent rise, median premiums for the same size firm would increase to £20,100.

In such as "worst-case" scenario, the FCA believes up to 1,000 "higher risk" personal investment firms might stop providing defined benefit transfer advice, although it stressed it does not expect this to materialise.

In February Sir Steve Webb, the former pensions minister, now director of policy at Royal London, said one IFA he spoke to was informed they could only obtain PI renewal if their annual premium was increased nearly fourfold from £13,000 to £50,000, and they agreed to an excess on each individual DB transfer case of £35,000.

An FCA spokesperson said: "The new award limit will provide further protection for consumers and small businesses. We consulted thoroughly before deciding on the new rules and firms have had sufficient time to discuss cover with insurers.

"If firms do need to obtain different PII cover and need a short time to obtain this then we will consider their individual circumstances."

The FCA board meanwhile appeared amenable to the idea of a smaller number of advisers operating in the DB transfer space.

It also suggested this would mean the players left would provide "affordable advice", although advisers heavily contest this logic.

Scott Gallacher, director of Rowley Turton Private Wealth Management, who is in the middle of renewing its PII, said: "If advisers do face a big jump in their premiums, the cost of advice to clients will inevitably go up.

"We look after our clients well, but we’re not a charity. Costs have to be covered. You may also see some advisers leave the market, which is also detrimental to consumers as this will limit choice.

"Frankly, I see little justification in the FCA increasing the compensation limit. The compensation scheme was designed to protect those that couldn’t afford to take an adviser to court.

"Any company making a complaint worth £350,000 should have the resources to take the adviser to court themselves, which is the better route. The scheme has just grown to be some sort of monster."