At least 263 financial advice companies told the Financial Conduct Authority their professional indemnity cover for claims was non-compliant after the compensation limit for the Financial Ombudsman Service was raised.
On April 1 the ombudsman's award limit rose from £150,000 to £350,000 after a short consultation, and the increase was met with concern advisers would struggle to find sufficient PI cover after insurers were unwilling to adapt their policies at first.
Three days before the rise in April the FCA sent an email to advisers asking those whose PI insurance policy did not provide compliant cover to complete an online survey and tell the regulator how they intended to obtain sufficient insurance.
The regulator said it would consider allowing firms extra time to make arrangements for alternative PI cover in light of the Fos increase, and stated it expected insurers to "deal fairly" with companies searching for compliant insurance.
A freedom of information request submitted to the FCA by FTAdviser revealed 263 financial advice companies responded to the survey informing the regulator they believed their PI cover was not compliant with the new requirements.
A further 12 responses were disregarded, either having been submitted in error or containing "nonsensical" data.
The regulator's firm contact centre also received 22 notifications, both written and oral, advising that an adviser did not have compliant PI cover, although these may have been included in the number who responded to the FCA's survey.
The FCA confirmed the email containing the survey was sent to all companies scheduled to complete RMA-E, the regulatory return by which firms confirm they are in compliance with prudential requirements relating to PI insurance, and who hold the advising on investments permission for the retail investment customer type - therefore, all companies who responded to the survey online or via the contact centre were financial advisers.
According to FCA rules advisers must have cover for the maximum claim amount, whether that be through PI insurance, spare capital, or a mix of both.
Most PI insurers now offer the full £350,000 cover, however in some cases this includes higher excesses, restrictions on defined benefit transfers and the possibility of "shared liability" on any claims brought against an adviser.
Chris Davies, founder of regulation technology company Model Office, said: "Advisers now face the dilemma of finding increased PI insurance cover to meet the new Fos limit thus will either have existing provision to increase with existing supplier or have to top up or take a new policy elsewhere.
"The ‘good news’ is they do have a limited grace period to do so.
"In this ‘hard' PI insurance market, mainly due to DB pension transfer sensitivities, it is good practice for adviser firms to hold more capital in reserves even if they have the full PI insurance cover.
"If they are struggling to purchase PI insurance then these cash reserves may well placate some of the compliance concerns but ideally firms need to meet the new limits through their PI insurance provider."