It seems the FCA plans to raise Financial Ombudsman Service compensation limits without properly assessing the unintended consequences on the cost and availability of professional indemnity insurance – an area which is already fragile. The irony is that this disjointed approach could end up seeing fewer consumers protected as a result of being left to fend for themselves. The decision is clearly in conflict with the government’s stated objective to increase access to advice.
Few would disagree consumer protection should be a key feature of the market and will provide greater confidence in the public to engage. Yet the proposed changes to compensation limits throw into question whether there is any joined up thinking at all between our regulators and government from a broader public interest perspective.
The Financial Advice Market Review sought to increase consumer access to advice and was coupled with a pledge to tackle cost and regulatory barriers for new and existing firms to achieve this. The recent concern surrounding defined benefit transfers has sent some PI insurers running for the hills, already leaving advisers facing increased premiums and excesses and, in some instances, no ongoing cover. This latest move by the FCA will only compound the issue.
What is more surprising is that the regulator is alert to the issue. Indeed, it included PI insurance within its FAMR review of Financial Services Compensation Scheme funding, making this latest move even more frustrating.
With the lowest savings ratio since records began, an ageing demographic and the increasing need and demand for advice created through pension freedoms, regulatory focus to support and protect consumer best interest seems somewhat confused.
Raising compensation limits without addressing the current cost of operating, FSCS funding and existing PI insurance challenges is akin to pouring petrol on the FAMR fire. It is time for a joined-up strategy where greater access for the majority is as relevant as compensation for the minority.
A solution has already been proposed which would fund both PI insurance and the FSCS in a practical, affordable and workable way. Crucially, it is sustainable.
The cost of the FSCS and consumer education could be covered by a relatively negligible few basis point deduction from the entire total of retail funds under management and collected centrally.
If adviser contributions went into the same fund to pool the risk, the current need for PI insurance would be replaced. While excesses would still apply, it could also provide run-off cover, stabilise costs and potentially reduce contributions over time. One thing is for sure: if PI insurers continue to harden their position or, worse, remove cover, it will significantly expose firms and their clients to some drastic unintended consequences.
Erosion of public confidence and trust at such a critical time must be mitigated by pre-emptive action, not reactive compensation reform.
Keith Richards is chief executive of the Personal Finance Society