The City watchdog is considering introducing third-party audits to show advisers have given good quality advice in a move to make professional indemnity insurance more obtainable.
The Financial Conduct Authority said firms which can demonstrate they have given good advice should be able to get PII that is priced fairly.
The regulator said one way to do this could be via a third party audit, where an independent company would assess the quality of advice given.
In its consumer investments strategy, out today (September 15), the FCA noted the PII market has hardened.
The number of active insurers has fallen from about 15 to five in the last five years, the FCA said.
In addition, PII costs for firms that have previously advised on defined benefit pension transfers have increased from around 1-1.5 per cent to 3-6 per cent of firm income.
The FCA said high PII costs would have contributed to firms finding themselves unable to meet their liabilities, which then pass to the FSCS.
The regulator said it will continue to monitor developments in the PII market and will report these back to firms.
The PII issue, coupled with rising FSCS levy costs, has been a problem in the advice market for a number of years but it has got worse following the British Steel pension transfer debacle.
Data from the FCA, published in July, found advice firms making up to £100,000 in revenue a year were forced to spend 5 per cent of that paying for PII.
But for the largest advice firms, the cost of PII as a proportion of revenue has either gone down or stayed flat.
As a whole, advice firms paid 2.4 per cent of their revenue towards PII during 2020.
Back in March, the FCA said if advisers were able to improve the quality of advice on DB transfers this would ultimately lead to lower PII costs.
It came in response to adviser criticism saying the FCA had “underestimated the challenge” faced by firms to get cover in the current market.
The main reason for this was that many of the issues skewing the PI market centred on historic advice, which will always have a place in backward looking insurance.
amy.austin@ft.com
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