FCA PI delay to cause 'severe hardship' for IFAs

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FCA PI delay to cause 'severe hardship' for IFAs

The Financial Conduct Authority has also been accused of "dragging its feet" over the increasingly hardened insurance market for advisers and growing regulatory bills, following estimations made by its boss that the problem would take "two or three years" to solve. 

Alan Smith, chief executive of financial planning firm Capital, said: "Regrettably this is reflective of public-sector mentality. Financial advisers and their staff, all across the UK are facing a fundamental challenge to their very livelihoods as well as their ability to support and advise their clients during what is obviously a very difficult period."

Mr Smith warned many firms were being "squeezed by the perfect storm" of substantial increases in regulatory fees, professional indemnity premiums and the challenges of operating and developing business during the pandemic.

He added: "To say that we are years away from any sort of solution is extremely disappointing and will cause severe hardship to many hard-working financial professionals doing their best to care for their staff and their clients."

It comes as the newly appointed chief executive of the FCA told MPs last week it would take "two or three years" to abate the industry levy and fix the current professional indemnity market, which he admitted wasn't "functioning particularly well" for advisers. 

Speaking at his second Treasury Select Committee, Nikhil Rathi said the regulator was aware of the "burden" increasing regulatory costs were putting on the advice community, however "for the majority of advisers it's a small portion of their overall regulated income".

But he added he understood the "strain that puts on specific firms".

Ricky Chan, director at IFS Wealth & Pensions, said whilst he was pleased the FCA had acknowledged the current system for both the PI market and the Financial Services Compensation Scheme levy were not working well, he was "very disappointed" at the lack of urgency to resolve the issue. 

Mr Chan said: "For business owners and advisers in financial services, our livelihoods are affected and could be threatened by an unsustainable FSCS levy and rising PI premiums alongside the withdrawal of cover and terms for some. 

"Simply saying that for most businesses it’s a small part of their revenue, just goes to underline the lack of urgency or care.

"This is just the FCA’s way of kicking the can down the road and hoping that everyone forgets about it or that the levy would naturally and gradually dampen down in future when the higher claims for unregulated Sipp investments and mini-bonds have been mostly paid out. But this is just procrastination."

Mr Chan said he wanted to see immediate action from the regulator and a consideration of the recommendations proposed by professional body the Personal Finance Society. 

He added: "[This should be the case] rather than doing endless consultations with no definitive course of action to show for it."

Under proposals repeatedly mooted by the PFS, financial compensation would be funded from both the market and a levy on the £9trn of retail assets managed by the UK investment industry.

The professional body claims such a levy, which would pay all existing compensation and fund proactive consumer education through the Money and Pensions Service, would only cost about 0.006 per cent of a firm’s assets under management.

Martin Bamford, head of client education at Informed Choice, said: "It simply isn't good enough for the FCA to drag their heels over these critical issues of FSCS funding and PI insurance affordability.

"Good financial planning businesses will go bust before reforms take place."

Mr Rathi's predictions of a two to three year solution were in response to a question from Treasury select committee chairman Mel Stride, who said MPs had received a "huge amount of correspondence" from IFAs on the issue of rising regulatory and insurance costs.

The timeframe for improvement was also echoed by FCA chairman Charles Randell who told MPs it would take "several years" to reduce the cost of the Financial Services Compensation Scheme levy and professional indemnity insurance which has plagued IFAs in recent years. 

Rising costs

The FCA's delay also prompted advisers to reinforce warnings that the cost of advice was likely to increase without a solution to rising regulatory bills.

Peter Chadborn, director at Plan Money, said it was "pleasing" the issue was being taken seriously but disappointing the timescales for resolve were so long.

He added: "This will absolutely be at the detriment of IFA clients and the wider consumer.

"In order to remain profitable, advice fees will have to increase to cover the exponential rise in PI premiums and the disproportionate allocation of FSCS levies."

Steve Carlson, adviser at Carlson Wealth Management, agreed, adding that increased costs to advice firms would "filter down" and widen the advice gap.

The concerns echo those raised in the summer, when advisers first began receiving invoices up to 61 per cent higher than last year's bill.

Mr Carlson flagged the impact on defined benefit transfer advice as the main victim, claiming that those without money to pay substantial fees upfront would find it impossible to get transfer advice.

He said: "Firms either can't get cover for it or don't want to because of rising PI costs.

"That, and the new rules on contingent charging, means people will find it extremely hard to get DB advice.

"The market was broken before, but what's happened hasn't fixed it — it's just broken it in a different way."

When approached about this article, the FCA had nothing to add to Mr Rathi and Mr Randell's comments on the situation. 

rachel.mortimer@ft.com & imogen.tew@ft.com