As more advisers are feeling the pressure of being exposed and failing to meet PI insurance costs without a clear longstop, what solutions are available for a way forward?
While the majority of complaints to the Financial Ombudsman Service go in their favour, advisers are expressing increasing concern that compensation claims could soon put real pressure on the profession’s future.
The FCA outlined plans last week to raise the FOS compensation limit by £200,000 to £350,000 by April next year.
Small- and medium-sized businesses with less than 50 employees and a yearly turnover below £6.5m or balance sheet below £5m will be able to refer unresolved complaints.
The FCA says an estimated 210,000 SMEs will now be able to take complaints to the FOS, potentially affecting those financial planners giving workplace advice.
FCA chief executive Andrew Bailey says that the changes are “as far as [the FCA] thinks we should go within our powers” and that increased access to the Ombudsman’s services will increase accountability in the industry.
The move has sparked new talk on the advice gap, with trade body Pimfa arguing that increased compensation will add more pain to already skyrocketing professional indemnity insurance costs and eventually force IFAs out of the market.
When it comes to adviser protection, the FCA has made it clear that its stance on the potential introduction of a longstop on complaints, placing a formal time block on how long clients have to claim compensation, remains unchanged.
At the regulator’s annual public meeting in September, director of strategy Christopher Woolard said the FCA felt empathy towards advisers but no immediate review of the issue would be considered. The last deep dive into the possibility of a long-stop came with the Financial Advice Market Review more than three years ago. It was decided that the number of complaints dating back more than 15 years would be too small to render the introduction necessary.
With no longstop, advisers are now more exposed than ever and struggling to meet PI insurance costs, with defined benefit transfers and esoteric Sipp investments also hitting the headlines regularly.
If up to £350,000 can be demanded of firms and their insurers, it is more than likely some claim repayments will not be met, leaving advisers to fear the cost will then be pushed over to the already-stretched Financial Services Compensation Scheme, which they are also part-funding.
Money Marketing has spoken with advisers and consultants on whether the changes to the FOS’ remit and the increasing difficulty securing PI insurance should reignite the longstop debate.
The cost of a compensation rise
The past 12 months continue to show the importance of consumer protection, with situations like the British Steel Pension Scheme collapse demonstrating the need to adequately compensate people who have received poor financial advice.
A £200,000-sized boost on compensation available is expected to push PI insurance premiums to levels not seen since the time of the Pension Review in the 1990s and advisers may hold concerns over whether they can still afford to do business.
Signpost Financial Planning director Nigel McTear says PI insurers’ tough focus on exactly what advisers are doing also adds pressure.
With only half a dozen PI insurers servicing small- and medium-sized advice firms, he says it is vital that advisers build a good relationship with them.
McTear says: “There are many bad apples at the bottom of the barrel and the problem is there’s a PI insurer somewhere picking them up and so the PI proposal form has gone from 10 pages of questions to more than 70 in only five years. They are asking a lot more of advisers so we can see where their concerns lie, and all this talk from the FCA on compensation changes won’t do anything to make them less cautious.”
FCA data shows that over two thirds of intermediaries are small enough to be required to only hold capital reserves of £20,000 or less.
Figures from former adviser trade body Apfa show average pre-tax profit of around £159,000 per firm, and £35,000 for a sole adviser.
Both these figures indicate that while established firms could have built up enough reserves to field the new highest level of FOS payout, some smaller, newer advice firms may not.