A single compensation claim could be enough to push some advisers into bankruptcy, Keith Richards has warned.
The chief executive of the Personal Finance Society, speaking on the FTAdviser Podcast, said this situation had been brought about by increasing excesses for professional indemnity insurance.
Mr Richards said: "In some instances we are hearing that excess amounts now far exceed the level of capital adequacy that firms are required to carry, so one compensation claim in the future could certainly push some adviser firms into bankruptcy."
He was discussing the issue of PI insurance with Brian Boehmer, a partner at Lockton specialising in PII.
Mr Boehmer said: "The capital adequacy requirements set out are insufficient. A typical adviser may charge, for handling funds, maybe 1 per cent so they could have £100m in terms of pension fund being transferred, they earn £1m from that work in fees, and the capital adequacy for that £100m is £37,000 so there is no correlation between the risk of transferring £100m of pension fund and the capital adequacy requirements."
The Financial Conduct Authority requires advisers to set aside capital of either £20,000 or 5 per cent of annual investment business income - whichever is higher.
Mr Richards and Mr Boehmer also discussed some of the exclusions insurers were now including in their policies and how advisers can navigate the tougher PII market.
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