Financial advisers are facing higher premiums on their professional indemnity (PI) policies as insurers are already factoring in the new Financial Ombudsman Service (Fos) compensation limit, Sir Steve Webb has warned.
The Financial Conduct Authority (FCA) proposed increasing the Fos limit from £150,000 to £350,000 in April as part of its plans to allow small businesses to use the claims service.
Under the plans published last October claimants will be able to claim up to £350,000 through the Fos from April 1, 2019 if the incident complained about took place on or after this date.
If it took place before April 1, 2019 the compensation limit will be £160,000 and both limits will be increased with consumer prices inflation every year to make sure consumers and small businesses receive adequate compensation.
But Sir Steve, the former pensions minister, now director of policy at Royal London, said one IFA he spoke to had been told 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 defined benefit (DB) transfer case of £35,000.
The adviser was also told by the PI insurer that they wouldn’t get cover if the client transacted on an insistent basis, the customer was aged under 50, or if the client came via an unregulated introducer.
In its submission to the FCA consultation on this matter, Royal London warned that the Fos compensation hike could lead to "huge rises" in the cost of PI insurance.
Sir Steve said: "As we warned, if there is a risk that advisers could face claims for over a third of a million pounds for a single DB transfer case, the costs of PI insurance could soar.
"Even before the FCA has confirmed that it is going ahead with the increase in the compensation cap, insurers are already further increasing premiums and policy excess levels as well as excluding some cases altogether.
"There is a real risk that if the FCA does not think again, many advisers will find it impossible to find affordable PI cover for transfer advice and will pull out of the market.
"It is very hard to see how this can be in the public interest. We urge the FCA to think again and not to go ahead with this hike in the compensation cap."
Similar concerns had been flagged by Russell Facer, managing director of Threesixty, last week (February 6).
Speaking at the Dynamic Planner conference, he said: "My concern fundamentally on that is that talking to underwriters it could be crippling for the PI market as a whole.
"Going to £350,000 is challenging. But people who have done their DB transfer arguably should have some form of protection."