PII eats up 5% of smallest advice firms’ margins

PII eats up 5% of smallest advice firms’ margins

The cost of professional indemnity insurance disproportionately affects the smallest advice firms, according to data published by the Financial Conduct Authority.

Advice firms making up to £100,000 in revenue a year are forced to spend 5 per cent of that paying for PII, the data showed.

Meanwhile for the largest advice firms, the cost of PII as a proportion of revenue has either gone down or stayed flat.

Meanwhile firms making between £100,001 and £500,000 in revenue paid 3.1 per cent of that towards PII.

As a whole, advice firms paid 2.4 per cent of their revenue towards PII during 2020.

Between 2019 and 2020, the proportion of revenue small advice firms are spending on PII increased by 0.6 percentage points - from 4.4 to 5 per cent.

The next biggest rise was half of this, at 0.3 per cent for firms with a revenue between £101,000 and £500,000.

The largest firms - those with revenues of more than £10m - saw no increase in the proportion they spent on PII since this has remained at 1.4 per cent.

For firms earning between £500,001 and £10m, the proportion has actually gone down slightly: from 3.3 per cent to 3.2 per cent.

“PII costs have been an issue for some time with advisers regularly reporting that they have become prohibitive,” Steven Cameron, pensions director at Aegon, told FTAdviser. 

All the while, “they have remained steady for larger firms”, said Cameron.

“This highlights just how important it is for continued focus on stamping out isolated bad practices which often lead to far wider hikes in PII,” said Cameron.

He said the FCA’s consultation on a new approach to decision making has the potential “to speed up FCA interventions, avoiding the vast majority of highly professional firms suffering”. 

Cameron added: “Smarter use of data and market intelligence by the FCA will also help. In many instances, this will be a far more direct solution than relying on the principles of a new Consumer Duty.”

Kathryn Knowles, a specialist protection adviser and managing director of Cura Financial Services, told FTAdviser the disproportionate hike in PII costs “is punishing the smaller firms simply because they’re smaller.”

“It’s really unfair,” she continued. “Smaller broker firms are the ones bringing new customers to insurers. I don’t understand the concept of why these costs should depend on a firm’s turnover. Brokers are doing a good job, regardless.”

 Average PII premium per firm (£)PII premium as a % of regulated revenue
Up to £100k revenue2,9355%
£101k to £500k revenue7,8433.1%
£501k to £10m revenue43,9733.2%
Over £10m revenue1,079,0041.4%
All firms24,7702.4%

The number of UK consumers seeking advice increased to 3.54m in 2020, up on 3.34m in 2019.

“This is despite the fact that the pandemic made it difficult to meet and advisers’ new business efforts had to be rethought,” said Cameron, who calls the increase “a great endorsement of both the industry and the value of financial advice”.

Despite increased demand for their services, the FCA data also found adviser revenue fell for the first time since 2016 last year, as the covid pandemic took its toll.

Adviser revenue fell by 1 per cent in 2020, to £4.4bn. Mortgage advisers saw an even bigger dip of 4.2 per cent to £1.22bn.