Defined Benefit  

Advisers face huge bills under new shared liability PI

Advisers face huge bills under new shared liability PI

Advisers could be asked to fork out thousands of pounds for complaints under new "shared liability" policies from professional indemnity insurers.

Shared liability is the latest in a string of responses from insurers to the new Financial Ombudsman Service compensation limit, which was raised from £150,000 to £350,000 on April 1.

Financial Adviser understands that Generali, which provides PI cover for some UK advisers, put such a plan in place as a temporary measure for claims against advice given after April 1, while it seeks to understand how to position itself following the rule change.

Shared liability means that for any claims brought the adviser would be liable to pay a percentage of the compensation given to the client.

This percentage differs depending on how ‘exposed’ the advice firm is to risk and the firm’s current excess limits.

Less exposed firms fall in a 20 per cent bracket while those who deal with higher risk businesses could be asked to contribute up to 50 per cent.

For some this could mean a £180,000 bill on a £350,000 claim, made up of £170,000 plus a £10,000 excess.

But advisers insured by Generali can opt for higher premiums or exclusions instead of the shared liability if they wish.

Advisers have said sharing liability, and the risk of advising on DB transfers since the Fos hike, could lead to a rise in capital adequacy requirements and could force some to close.

Dave Penny, managing director at Invest Southwest, said: "The amount of money advice firms will have to have backed up will go up by a large amount, and it’s hard to see how smaller businesses will survive.

"In particular, small firms will not be able to work in the defined benefit transfer market unless they are very specialist. I’m certainly glad I’m not in the market."

Other PI firms, such as Liberty Speciality Markets, are offering to cover the whole £350,000 but with exclusions, added costs for riskier business and higher premiums.

For example, Liberty will collect higher premiums from those who remain in the defined benefit transfer market, while other PI firms have excluded any advice given to British Steel members from their cover.

The regulator had been warned that hiking the Fos limit could have dramatic effects on the advice market, particularly on advisers who hold defined benefit transfer permissions.

DB transfers have been in the spotlight following the fallout from the closure of the British Steel Pension Scheme in 2018 which led to bad advice being given by some rogue players, and scores of claims being brought to the regulatory bodies.

An adviser, who does not wish to be named, told FTAdviser that he thought the current PI debacle was going to vastly shrink the supply of advice, drive advisers into the arms of networks, reduce choice and drive up the cost of advice.

He said: "Firm guidance, rules if you like, are required from the FCA. If they really don’t like DB transfers they should ban them. Otherwise let us get on with the job."