As someone who lived through the previous pensions review, watching the FCA playing catch-up has resulted in an overwhelming sense of déjà vu.
We now have the conditions where a reduction from 5,000 pension transfer specialists to just 500 in under a year is entirely possible.
As excesses climb exponentially and the conditions worsen, many will see giving up permissions as the logical thing to do. But if you have given advice on defined benefit transfers, then cover is needed for past business.
We have already seen some major professional indemnity insurers refusing to take on new business. Should one of these insurers then decide to withdraw from the market entirely it is doubtful that cover for past advice would be easily found.
Exclusive: PI insurer Liberty pulls DB transfer cover for new business
Cover needs to be ongoing even if permissions are given up because, if cover ceases, despite the insurers charging substantial premiums while they were covering, they do not provide cover for claims on past business – even if the advice was given while they were paid up.
This is a key difference between PI cover and employers’ or public liability, where those on cover when the claim happened end up footing the bill. That’s not the case with PI and that’s a difference that is essential to understand.
For those continuing to advise, the increase in cost will impact on advice costs and the profile of the client you seek to advise.
I have said in this column before that investment and financial competence needs to be tested. Where someone seeks to self-invest, if they cannot be robustly categorised as a professional investor, then I’d be shocked if most firms didn’t give them a wide berth. I would also suggest that their track record to date needs to be checked – i.e. back testing.
Rob Reid: Tell FCA why scrapping contingent charging is problematic
In its latest consultation paper, the FCA suggests pension transfer advice costs in the region of £3,500. Perhaps it did this before the PI increases, but it is totally ridiculous.
A typical premium is around £12,000 even for a one- or two-adviser firm. Excesses could be £5,000 to £15,000 or more, with a maximum of six cases per annum. If we assume that the previous year’s premium was £3,000, then this increase of £9,000 is £1,500 per case. That makes a big dent in the £3,500.
Fees will increase and will move into five figures soon for the initial report alone. This means that those with transfer values less than £250,000 may struggle to see the value in paying the fee.
Perhaps this is the driver behind abridged advice, but even then, the PI providers are so far lukewarm to this potential development. As we watch this all unfold, the public are largely in the dark. It’s time the FCA started to keep them in the loop as to the reason fees are increasing and advice on this issue is becoming harder to find.
Walking clients through the process is essential, as we cannot wait on the FCA to inform them. We need to provide them with the work that has to be done and how their information shapes the outcome. They have to understand that there are times when their objectives are simply undeliverable. We all need to banish the illusion that you can maximise your lifestyle-driven income while leaving a substantial fund to your children. You simply can’t have it all.
Rob Reid is principal of CanScot Solutions
You can follow him on Twitter @reidmoney
Based on what Rob is saying basically it appears PI insurance isn’t fit for purpose and neither is FOS/FSCS currently?
There may not be a perfect solution but surely long term PI cover that is fit for purpose is the main one. Insurers should be more pro-active in spotting the wrong-uns or higher risk people and charge them accordingly.
If the insurers can rely on the regulators and governments being more clear and consistent then hopefully the PI should be as well.
Obviously an endless cover period will be more costly than one year but in this pension context one years cover is worthless and why would a current insurer want to cover and pay the claim for a past event that was effectively u/w by another insurer?
Could insurers review and innovate their product and service. EG: Offer potentially better insurance terms with access to audit/compliance reports or they could even instigate their own audits of IFA’s.
What info do they currently use when u/w PI cover? Just claims info? If it’s anything like standard indemnity insurance then I guess they don’t use much info.
The alternative is not to use PI so much but instead for the public sector to arrange this cover properly with more tailored auditing and u/w including potentially tailoring the levy (premium).
The PPF model for DB schemes is far from perfect but they realised that you couldn’t just charge all the schemes the same way so had to apply some element of u/w.
The regulator/ombudsman services might also want to review and innovate as well.
EG: Merge the regulator/ombudsman services (particularly pensions) to save costs, there would also be an element of cross subsidy, easier for consumer to have just one place to go for a pension complaint especially as some complaints may actually involve various organisations and stages of a given process. EG: Pension transfer complaint may involve advice/advisors (FOS/FSCS) as well as administration/administrators (POS).
How many government bodies are currently involved in pensions? Treasury, FCA, FOS, FSCS, HMRC, DWP, tPR, POS, MAPS, PPF (inc. FAS, etc.), NEST (set up by gov.)
Have I missed any?
When it comes to unregulated investments within regulated products (IE: Pensions) then HMRC could do more here rather than FCA as HMRC could look at changing legislation and their PTM rules as to what can or can’t be invested within a pension.
The overall pension transfer process could be more consistant, slicker and therefore less costly but this will also require better IT and therefore data.
For the sake of pension freedoms there needs to be a cost effective solution(s).
What you propose is a contractual right to indefinite run-off cover (at a reasonable price), but PI insurers simply aren’t prepared to provide it and not even the FCA can force them to do so. Were it to try, insurers would simply withdraw from the market and cover would no longer be available for anyone.
The only workable solution (of which I’ve read) is for PII cover to be woven into the FSCS, as suggested by the PFS and resolutely ignored (or tacitly dismissed) by the FCA.
It would take a fair few years for the FSCS to build up sufficient reserves to cover such (potential) liabilities, but I suppose a gradual phase-in period might work, on the basis that the FSCS would cover a gradually increasing amount of any claims.
In the meantime, firms would incur additional FSCS levies that would very probably be greater than any reductions to their PII premiums. But, in theory, it could work ~ eventually.