All professions have their taboo subjects that make everyone go silent and fidget nervously at the dinner table when brought up.
Among advisers, defined benefit transfers are the topic which tends to split the room.
A new study about advisers’ attitudes towards the transfer market reinforces anecdotal evidence that professional indemnity insurance bills are heading skywards as providers become more nervous about the risks involved.
Research by NextWealth and Richard Parkin Consulting with support from Bravura looks at various factors affecting the DB transfer market and how these might affect the volume of DB transfers.
It is based on a survey of 267 financial advisers, in-depth qualitative interviews and data from platforms. The findings make for particularly interesting reading as they present one of the first definitive assessments of professional indemnity insurance coverage in relation to DB transfers.
On PI, the study finds 39 per cent of advisers renewed their PI insurance in the past year with an average premium increase of 21 per cent. The FCA’s latest figures for 2017 on PI insurance suggest larger financial advice firms have been able to manage their costs better than smaller firms, but it has acknowledged the potential for increased premiums and reduced coverage amid warnings on DB transfer suitability.
The FCA said financial advice firms with revenue under £100,000 paid an average premium of £2,400, which represents around 4 per cent of their average revenue. This compares with just over 1 per cent of revenue for the large firms with revenue of more than £10m.
Research for a recent cover story by Money Marketing on the subject of how networks and national advice firms are adapting to heightened FCA scrutiny on DB transfers also suggested larger firms appear to be weathering the PI insurance storm better.
One large network that did not want to be named said it has had no problem with securing PI insurance, but the increased focus from its insurers on final salary transfers could be affecting smaller firms.
The network added it knows of one adviser who left to become directly authorised, but rang the network’s pension specialist team a few months later to ask if it had PI insurance cover.
While the FCA, large networks and NextWealth are all reporting similar PI insurance coverage pressures, not everything in the latest report is doom and gloom.
NextWealth finds there is a lot of optimism among advisers regarding DB transfers over the next 12 months.
Despite increasing regulatory and media attention on DB transfers advisers are, overall, optimistic with nearly 80 per cent believing transfer volumes will either increase or stay the same over the next year.
A quarter of advisers expect that the FCA’s changes to be introduced from October 2018 will make them less likely to recommend a transfer to their clients.
Furthermore half of advisers believe a ban on contingent charging would lead to a reduction in transfer volumes with 60 per cent of these saying volumes could fall by over 25 per cent.
Although PI insurance premiums are rising the study finds this is more likely to result in advisers increasing fees or focusing on higher value cases rather than reducing the volume of transfer business they do. But it is also notes the bigger issue will be whether advisers can get cover at all.
Commenting on the findings consultant Richard Parkin says: “The explosion in DB transfers has understandably raised regulatory concerns and it is notable that 40 per cent of the advisers we surveyed don’t offer DB advice at all.
“Despite this closer regulatory scrutiny, advisers seem reasonably optimistic that the DB market will at least stay flat if not grow from here. We believe that advisers may be being too optimistic.
“The FCA rule changes shouldn’t come as a big shock for good advisers but they may make transfers harder to recommend.”
He adds: “However, there are some very clear risks to the market. A ban on contingent charging is likely to have a significant impact though we believe it will be difficult to ban all forms of contingent fee. Perhaps the bigger concern is the cost and availability of PI insurance.
“Those advisers who have recently renewed their PI insurance cover and seen premiums increase aren’t necessarily inclined to reduce transfer activity.
“During the course of our research though, we heard more advisers telling us of exclusions or limits on their policies and this could have a significant impact over the coming months.
“Reports of the claims management companies seeking unsuitable advice will inevitably worry insurers and make cover harder to come by.”