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Does FOS compensation limit hike justify a surge in PI bills?

Change will benefit fewer than 500 consumers, but resulting premiums rise could force small firms to stop providing advice

The FCA’s decision to increase the Financial Ombudsman Service’s compensation limit from £150,000 to £350,000 from 1 April continues to receive significant backlash from industry bodies.

The knock-on effects will impact the long-awaited evaluation of both the RDR and the Financial Advice Market Review.

Advisers seeing bills increase have criticised professional indemnity insurance providers for hiking premiums, but insurers say even higher premiums will be needed to stump up for claims under the higher FOS limit.

The new limit will benefit some consumers, but experts say advisers have already felt more than enough pinch from PI insurers asking for more money.

The FCA’s own estimates show only 500 complaints will require compensation above the old £150,000 limit but below the new £350,000 limit.

This is down on an original estimate of 2,000 the FCA reached last October when it first announced its plans to increase the FOS limit.

Of the 500 who would require compensation, the regulator estimates only around 375 complaints would be upheld and subsequently covered by the new cap.

However, under its worst-case scenario, the FCA says advisers’ PI bills could increase by as much as 140 per cent due to the new cap, and that insurers themselves had forecast PI premium increases of between 200 per cent and 500 per cent.

Royal London policy director Steve Webb says PI insurance has already risen in anticipation of changes to the FOS limit and would most likely continue to increase.

“PI insurers have already been hiking premiums in anticipation of the change, but the regulator is pressing on regardless.

“It is a shocking decision and if even fewer members of the public are unable to access advice then this will be counter-productive, and consumers will lose out as a result.”

FCA data shows advisers paid out more than £300m for PI in 2017, with the average around £17,540 per firm.

When looking at average premiums paid as a proportion of regulated revenue, small firms generally pay a higher percentage than larger firms.

But while only 500 new claims could arise, the FCA notes this could result in £47m more compensation, and £37m in additional PI-underwritten liabilities.

Money Marketing spoke with PI provider PolicyBee which says insurers’ claims that their costs are justified remain fair.

Head of service Kerri-Ann Hockley says: “It can be really difficult to explain increases to clients, especially when they have not had any changes to business or any issues. And, of course, it’s insurers increasing premiums to reserve enough so that when claims do arise, that they can reasonably expect would, they need to know they have the money to pay for those claims.

“Specifically, in the financial sector, there will always be hikes and changes, but they are always linked to a specific incident which causes insurers to need a re-look at how they rate a certain group – for example, financial advisers – and often find they are exposed to something they did not expect to be and have to increase premiums when that comes to light.”

Hockley says any changes in premiums will also follow general market trends. That includes the number of insurers across multiple occupational groups that are dwindling.

She says: “Providers that are left will then put their premiums up because they are not fighting for the business in the same way and that is the right thing to do because many more insurers can be shut down by the claims that are coming in and not being able to pay those out.”

The FCA did release some data on PI returns in the advice sector last June, but has been unable to provide a full breakdown of the information advisers input into the Gabriel reporting system.

The impact on advisers
The FCA admits that the PI bill hike resulting from upping FOS compensation limits could even push small businesses out of the market despite efforts to increase competition to ensure a healthy market.

The regulator’s worst-case scenario outlined in its 8 March policy statement estimates more than 1,000 “higher risk” advisers could stop providing defined benefit transfer advice under a £350,000 award limit because they would be unable to afford PI cover.

Personal Finance Society chief executive Keith Richards says a limit increase affecting so few claims is a “reckless” move from the regulator that leaves PI insurers between a rock and a hard place.

He says: “The market continues to harden with increased costs being experienced across the sector and this latest move will serve to compound the issue and can only be described as reckless [and] has already left many advisers facing increased premiums, increased excesses and, in some instances, no ongoing cover.”

Advisers can only hope PI is addressed adequately in the full review of FAMR this year. Richards adds: “What is most surprising is that the FCA is alert to the issue and included PI within its FAMR review of Financial Services Compensation Scheme funding, and yet this latest move seems to ignore the wider public interest agenda.”

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. Trevor Harrington 26th March 2019 at 11:24 am

    By the FCA’s own figures of approximately 500 cases being assisted by this higher claim amount, and assuming a median £150,000 extra per those claims, it still means that the PI insurance underwriters will need to fund and extra £75 million in each policy year.

    Insurance is not free, and higher claims amounts have to be recovered, or else the function of a pooled insurance fund ceases to function.

    The real question is whether the Insurance underwriters choose to recover these figures from those Advisers who are dealing in defined benefit pension transfers only … or from the entire profession, including those who are not licensed to do such work.

    Probably a bit of each I suspect …

    • The rules don’t apply to teh FCA and it’s staff, they just make it up as they go along as they write the rules and then ignore them.

      500 people…

      2. Proportionality We must ensure that any burden or restriction that we impose on a person, firm or activity is proportionate to the benefits we expect as a result. To judge this, we take into account the costs to firms and consumers.

      https://www.fca.org.uk/about/principles-good-regulation

  2. The PI Insurers currently are refusing to look at the cost of additional cover fore anyone not due for renewal. Having just renewed cover before the suggested increase this means we are unable to secure insurance at the new level.

    So, on the 2th April all business who have not secured cover to the new limits, in other words dam near everyone will need to report a breach of FCA rules to the regulator. They do not have full insurance cover and so will be in breach of regulation.

    You cannot make this up. The FCA never seems to think before it acts. It takes years to review simple questions or problems, yet give the industry short time frames to act and implement. Maybe it is time they faced the same pressure.

    Take the current pension crisis and the main reason this increase is required. They were notified of the likely outcomes of pension freedoms, took three years to talk, review and only with weeks to go provided their guidance and new permissions of secured benefits. Pension fraud is at an all time high, unregulated funds being used to steel millions all pointed out by the industry five years ago. They intend to look at this in the next 12 months! In other words no rush, we will just increase the payments as that is easier.

    So, for around 500-2000 individuals, they have put the whole industry in to turmoil, increased overall costs to all consumers, seeking to protect this very small number, instead of tackling the real issues and major problems.

    This will effectively close the DB market to all but the very wealthiest of the population, which clearly has always been the desired outcome.

    • I have been going backwards and forwards with teh FCA on this for about 2 weeks and they don’t know what they are doing or how they are going to solve this without getting egg on their face or seeing firms having to cease trading for having non compliant PI.All on the record as we record every single worj which shows half their staff didn;t know about the FOS increase and those that did didn’t know how it would incraese cap ad requirements and then the implicaitons of a collar at £15ok meaning it is effectively oen strike and you are out and then all subsequent claims will fall to FSCS wheras with the £150k, multiple claims might be met and a firm continue trading provided they paid the excess which most good firms WOULD. With the collar, if you have had to pay £200k, you are not going to continue doing this job, you are going to go for the FCA’s juggular if you are an honest person who knows the consumer lied to the FOS but they failed to take note of evidence and then took most of the value of your home and then your livelihood too.
      The incraese has been porrly thought out and rushed through when even if you did agree with it, it should have been one year AFTER the polict statement allowing for a smooth renewal of PI cover for all.
      This is just plain incompetent on shows the arrogance of the F-pack and why I will continue to say the system is morally corrupt.

  3. If it is targeted at those doing DB Transfers only, then the impact would be even more severe.

  4. Until the FCA / PROVIDERS PREVENT un regulated investments and FOS declares that they are not covered, no it is not worth it.

    Goodness me, it feels good to be final out of this mess

    • Well, yes, the FCA could address the issue of unregulated investments by mandating a system of special permissions and relevant PII cover for those wishing to advise on/sell them. Those two measures by themselves would dramatically reduce, if not entirely eliminate almost overnight, the small rogue element of advisers mis-selling them. Why ever doesn’t the FCA enact such rules?

      As for the new FOS limit, this (as I understand it) will apply only to transactions after the date it comes into force, not to those prior. So, combined with the fact that virtually no PI policies cover dangerous off-piste stuff anyway and assuming that most of the good guys who go nowhere near any toxic stuff, who will continue to give (largely) suitable advice and who aren’t getting any complaints, one wonders what lies behind this knee-jerk reaction from PI insurers. Then again, we don’t know if they’re seeing an upsurge in complaints against even the good guys.

      • Sorry Julian, you ate wrong, the £350k is for all claims after 2nd April, not when the business was written and with no long stop, that is from the date the firm started trading. In our case 2005.
        As Martin Evans says many firms existing PI will suddenly become no compliant due to the cap in existing policies at £150k and insurers are not offering an increase at renewal yet. S@@t is going to hit the fan in next 2weeks.

  5. The whole compensation issue requires root and branch reform.
    The uncertainty of FOS decision making, the lack of appeal of Ombudsman decisions,no long stop on advice, PI requirements to meet claims with increasing excesses and narrowing of cover
    all point to this. Solution? Move to a product levy based system paid for by the people for the people.simples!

  6. The FCA state that they expect the extra insurance liabilities to be £47m but premiums to increase by £37m.

    Maybe I’m getting old but unless insurers are feeling particularly generous this makes no sense to me.

    Perhaps the real issue is not right now but what happens when DB transfer claims start to appear in significant numbers. This move puts insurers on notice as it’s clearly designed to capture these claims. At that point PII won’t be around for long…

  7. On a positive (my PI renewal is not till Oct) I will be out of work by the 2nd April and odds on will not offer additional cover
    As Martin Evans has pointed out many many others will be in the same boat as I won’t be able to satisfy FCA rules ……

    I will turn off the light say goodbye to clients and a business I have run for nearly 27 years leaving my clients to the banks and scammers

  8. MM – you need to do a separate article on the regulatory aspect of this. When the changes come into effect there will be a large group of firms who do not have compliant PI cover through no fault of their own.

    Questions for the FCA on how this has been allowed to happen and what they are going to do about it would be good.

    • I can even give them the names of the three people I have spoken to so far at the FCA, all junior staff who don’t appear to have a scooby, so not really fair to name them to be named, but then it’s not very fair to my three staff who may be made redundant through no fault of their own when I have had NO complaints EVER go to the FOS and no claims on my PI EVER.
      I have told eahc of them in turn to give me the name of who is pulling their strings so we can make sure that the S**T goes UPHILL for a change until we perhaps get to Andrew Bailey, so we know who to blame when we’re all out of work and he can’t claim he didn’t know. Going straight to the top often doesn’t work. but going up a line at a time so each time someone says it’s above their paygrade may.

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