Professional indemnity insurers could kill the market for insistent pension transfers “stone dead” by refusing to offer cover, as fears over liabilities continue to grow.
The issue of whether or not advisers should process defined benefit to defined contribution transfers following a negative recommendation has divided the industry.
And following repeated concerns over future complaints, PI insurers are now considering applying exclusions for insistent clients or increasing the cost of policies to cover the risk.
Personal Finance Society chief executive Keith Richards says: “PI underwriters are alert to the potential risks of DB to DC pension transfers.
“Insurance broking firm Willis has contacted the PFS to express concern that the pension freedoms are already starting to represent a challenge when placing the insurance of financial advisory firms. They say some insurers are even choosing to defer to write these risks and others have altered their pricing model accordingly.
“There is currently no suggestion that insurers are looking to pull out of the market but we may see pricing changes and exclusions.”
A senior source at a PI broker says insurers are looking at creating exclusions for insistent clients.
He says: “They are concerned that several years down the line, if the client loses out they could turn round to their adviser and say ‘you should not have processed the transfer’.
“Insurers are waiting for someone to put their head above the parapet on this, but the feedback we are getting from them at the moment is that advisers should be steering clear of insistent client requests.”
Insurers can apply an “endorsement” at application or renewal which excludes a certain type of business.
Yellowtail Financial Planning managing director Dennis Hall says: “We have just renewed our PI policy and I made it clear on our application that we will not be doing any DB to DC transfers. I think insurers will see that as a risk and I want to get the best possible rate.
“You just cannot predict which way ombudsman judgments are going to go, and we have seen what has happened in the past when there has been a relaxation in pension rules and the industry has been punished for doing what it thought was best at the time.”
Willis declined to comment, as did PI insurers Liberty, AmTrust International and Arch Insurance.
The PFS is warning that advisers risk being at the heart of a new misselling scandal if they process insistent clients.
Any saver who wants to ditch their DB scheme for a DC plan to take advantage of the new pension freedoms will be required to take advice before transferring.
Speaking at a Money Marketing Wired debate last week, Richards warned advisers who do process insistent clients leave themselves open to future ombudsman claims.
He said: “The problem is the volume of new clients who have not been advised before who simply want to access cash through their DB scheme. That could end up in quite a significant misselling scandal in the future.
“When some future Government or regulator decides that too many poor outcomes have materialised, it will then be deemed as a real national disaster. And irrespective of how well documented the insistent client process is, the adviser is still vulnerable to a complaint being made against them.
“Our concern is that the profession will end up with the reputational damage and every consumer will have a right of redress. If the adviser isn’t around any more then it will fall on the compensation scheme to pay.”
However, TenetSelect and TenetConnect managing director Mike O’Brien said advisers should be able to process insistent transfers in some circumstances.
He said: “If advisers go down the route of saying you will not even support those doing suboptimal solutions, you do leave them open to the unscrupulous who will service them, for sure.
“If someone wants to eventually encash their money then is it not better to advise them of the most tax efficient way to do it, rather than leaving them with a huge tax bill which certainly won’t paint the advice sector in a good light? It is too black and white to say ‘do them all’ or ‘don’t do any’.”
How much for a letter?
Apfa director general Chris Hannant says one of the trade body’s members had already been approached by a saver asking: ‘How much for a letter?’
“The tension will come where you have long standing clients who you want to provide a good service too and you don’t want to damage the relationship you have got,” he says. “They are slightly different to the person who rocks up and says out of the blue they want their money.”
Money Marketing understands corporate contracts are being won or lost on the basis of advice firms’ risk appetite for insistent clients.
One adviser, who does not wish to be named, says: “We lost a contract recently because we said if someone is doing something that would obviously be disadvantageous to them in future we would not transact that business. But another advice firm said they would.”
However, insistent transfer business could be blocked by providers.
Royal London business development manager Fiona Tait says the provider will only accept DB transfers where a positive recommendation has been made by an adviser.
“We believe firmly that people should have an adviser involved,” she adds.
And experts say if PI insurers create exclusions for insistent clients, even advisers who wish to process this type of business will be barred from doing so.
LEBC longevity director Nick Flynn says: “PI insurers will be watching this very carefully and if they won’t cover advisers, it will kill the market stone dead. Any adviser would be mad to do it without insurance.
“But there needs to be a route for insistent clients and if advisers cannot transact cases like this it could push people to the dark side. They will go online and could end up in the hands of unregulated firms or scammers.”
Experts say further clarity on the issue is needed from both the Financial Ombudsman Service and the FCA.
A spokeswoman for the FCA says: “Where an individual insists on going ahead with the transfer, even when the advice is against it, the adviser should set out their advice clearly in writing and keep it, along with a clear record that the customer has insisted on proceeding with the transaction.”
But Hannant says: “We need clarity from the FCA. In the new world where the Government has set out a procedure, the book of business of a perfectly respectable adviser doing a fully professional job could look very similar to someone who has absolutely no scruples whatsoever.”
The PFS is in continuing discussions with the regulator and Government on the issue.
Richards says: “If the Government expects advisers to facilitate transfers irrespective of their advice to support the spirit of pension freedoms, there must be a change of process to further protect consumers and provide clarity that advisers will not be held accountable when poor outcomes materialise.
“The PFS has proposed an additional independent warning from the scheme trustee, highlighting the irreversible consequences and highlighting exclusion from any form of future redress against the adviser, trustees or the FSCS.”
A FOS spokesman says: “The FCA’s existing rules on fact finds and suitability documents already provide scope for a financial adviser to record what they’ve recommended (or not) and why. So should a complaint arise, the ombudsman can form a balanced view of the nature of that advice.
“Ultimately, financial advisers know that there’s a big difference between an insistent client with considerable investment experience and someone with none who wants to move all their money in to a risky unregulated scheme. We’re confident that advisers understand this and will continue to do the best for their clients.”
The FOS says some advisers have expressed concerns that it overrules execution-only documents.
But the spokesman says: “The ombudsman only decides that execution-only documents don’t apply under exceptional circumstances.
“For example, in the past we saw a case where a consumer was told to sign an execution-only document after being given a three hour ‘hard sell’ presentation on risky financial products. It was clear that they’d been given misleading advice despite signing the declaration. But cases like this are not representative of the advice usually given by advisers.”
Concerns have also been raised about the impact of rising regulatory costs for advisers.
This week life and pensions advisers were hit with a shock £43m hike in their Financial Services Compensation Scheme annual levy.
In January, the lifeboat scheme proposed a 2015/16 levy for life and pensions advisers of £57m, up from £24m the previous year.
But this week it announced this has increased to £100m following a further rise in Sipp claims. This is on top of a £20m interim levy for life and pensions intermediaries announced in March.
Threesixty managing director Phil Young says: “Regulatory fees are rocketing and advisers are being asked to accept more risk into their business.
“Something needs to change if the FCA is to fulfil its responsibility to encourage healthy competition amongst all aspects of financial services, as there is a long term risk that adviser numbers will dwindle.
“Unless good advisers are given the confidence that they can engage with clients on pension transfers, the bad guys will thrive to the long-term detriment of consumer confidence in financial services. Advisers will ultimately pick up the tab through the reputational damage and higher regulatory and FSCS fees.”
Hannant says increasing FSCS levies are “unsustainable”.
He says: “The Government wants advisers to play a significant role in the pension freedoms, but for advice to be widely available and affordable the issue of liabilities needs to be looked at.
“What the adviser takes responsibility for and what the consumer takes responsibility for must be reconsidered if the reforms are to be workable in the medium-term.”
Tim Page, director, Page Russell
Advisers at the coalface are between a rock and a hard place. Their instinct is to help a client, but if you’re not going to get cover or it will cost you significantly more, that will stop trading full stop. If your business could be put in jeopardy, then the decision becomes a lot clearer.
Daren O’Brien, director, Aurora Financial Solutions
Most companies will understand PI insurers’ decision and move away. I can’t see many advisers doing insistent clients. There won’t be the facility for people to transfer unless it is in their interest – that frustrates the Government’s agenda.
Expert view: Genuine insistent clients are rare
The concerns in relation to insistent clients emanate from the possibility that some financial advisers will carry out large-scale pension transfers without conducting bespoke analysis for each and every client. They will attempt to rely on the idea that the clients who are being encouraged to transfer are “insistent”
This is wholly wrong. Those clients being encouraged to transfer en masse and who see their benefits materially reduced will quite rightly bring a claim against the adviser for failing to properly analyse the transaction and highlight the appropriate risks.
As a professional indemnity underwriter, we monitor the number of pension transfers that occur on a monthly basis for all our insured customers. In this way we can identify any upswings in relation to this activity.
When a full analysis is undertaken we would expect the number of insistent client transactions to be nominal.
It is very rare for a client to reject financial advice which is to their own financial detriment.
All advisers dealing with transfers from defined benefit pension schemes should be carrying out a complete analysis of all the changes which occur when transferring. A failure to do so will result in awards being made against them.
Advisers should remember the pensions misselling scandal of 1999 which resulted in compensation awards of £13.5bn.
If a transfer is being undertaken which results in a reduction in expected benefits this must only be undertaken in exceptional circumstances and after all alternative solutions have been discounted.
Having given full risk warnings and explained how the reductionin benefits will be applied, it will not be necessary to classify the client as “insistent”.
Paul Barnes is director at Hoyl Underwriting Management