Advisers historically involved with defined benefit transfers have been urged to look more closely at self-insurance options after hopes for PI rule changes were dashed.
The Personal Finance Society suggested members who have previously advised on pension transfers should think about their firm's provisions to protect their "clients, employees and business" amid an increasingly tumultuous professional indemnity landscape which has seen advisers face rising premiums, a growing number of exclusions, and self-insurance policy terms.
Keith Richards, chief executive of the PFS, told Financial Adviser: "It is common practice in big firms but should now be for smaller firms, too - it is absolutely imperative firms plan for the worst and hope for the best. Not preparing financially can force solvent firms into administration."
The warning comes as the Treasury refused to intervene in the PI market over consumer detriment concerns.
Stephen Kinnock, Labour MP for Aberavon, had called for PI rules to be aligned with those in place for solicitors. But John Glen, economic secretary to the Treasury, dismissed the call, saying an approach of mandating policy terms or uniform policy wordings could “result in PII becoming either unavailable or unaffordable”.
The industry, including the PFS, has been frantically trying to come up with new ways of fixing the PI insurance problem, which hit boiling point this year through a combination of rising pension transfer claims and the newly increased £350,000 compensation limit at the Financial Ombudsman Service.
The PFS boss said good advice firms were at risk in the current climate, and that not recognising the challenges posed by PI insurance could leave a firm "exposed to catastrophe".
Mr Richards had previously said the Treasury was "quite receptive" to the idea of a protection levy, as proposed by the PFS in May. This would be collected centrally by government and paid into a pooled risk-based fund, in turn removing the need for PI insurance.
But there have been no signs of such a development since.
He added: "What worries me is the extent to which the advice sector is being left exposed, and yet policy makers are not engaging with this.
"There is evidence they recognise the issue but they just aren’t dealing with it. One claim could push an adviser under, leaving consumers exposed."
Some advisers have already started to self-insure as a result of exclusions on their PI policies.
Alan Chan, director at IFS Wealth & Pensions, said he has seen an increasing number of smaller advice firms go down this path.
He said: "It is a worrying trend because professional indemnity insurers can exclude any case they deem to be too risky and their appetite can change at any time.
"Something that was insurable could become uninsurable overnight. Advisers need to be prepared for these eventualities."
He added: "The other worrying issue I’ve seen discussed is that some firms are voluntarily excluding defined benefit cases from their insurance in order to have lower premiums when compared with the additional capital adequacy requirements.
"This is a concern for me because essentially PI is not worth the paper it’s written on anymore. Ultimately it is consumers who may lose out on the right protection and any compensation bill will fall to the rest of us if the firm goes bust."
But self-insuring involves substantial capital resources. The PFS has previously warned the Fos changes had forced advisers to increase their overall charges to offset higher insurance premiums.
David Hearne, director at Satis Wealth Management, said: "We may not need to invest in new factories or spend years on uncertain research and development, but we need capital to cover all the risks we are taking.
"This includes having deep pockets to self-insure and being prepared for a future that may involve lower markets and lower revenues."
The debacle could see more small firms leave the market. There is a sense the regulator may be condoning a shrinking advice market, especially in the DB transfer space: minutes from a meeting in February showed its board backed the Fos increase because it would create a more focused advice market.
Justin King, managing director at MFP Wealth Management, found professional indemnity cover this year on what he considers are "reasonable" terms, but said his premium had increased significantly.
He thought it "unlikely smaller advisers would begin self-insuring because of the huge associated costs" and instead expects more advisers to outsource business to defined benefit transfer specialists.
These are then able to manage the risk under their own indemnity cover, he said.
rachel.mortimer@ft.com
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