Unintended consequences of the pension reforms could further affect access to advice, ultimately derailing consumer freedom and choice.
There is already evidence professional indemnity insurers are beginning to withdraw cover or harden terms for advisers associated with defined benefit transfers.
But this is not a failure of PII. It is a more fundamental system failure, which can only be solved by government intervention as originally intended as part of the Financial Advice Market Review.
PII has been investigated by the regulator as part of a wider review into the Financial Services Compensation Scheme. Well intentioned as it is, the FSCS was designed at a different point in time and has built up an unknown level of legacy liability over many years.
It is proving unfit for purpose and the growing concern over DB transfers is likely to compound the level of liability placed upon it, which will result in a poor outcome for both consumers and the market.
The time has come to look at a more broad-based solution, combining fair and cost-effective levies in tandem with a public financial education programme. This could be in the form of a savings and investment protection and education levy, collected centrally by government.
On the premise most in the market accept the need to contribute to regulation and protection, the funding could be achieved without any accusations of bias, unfairness or punitive prioritisation.
Consider this: funds under management in the UK retail sector – pensions, Isas, investment trusts, life investment products and so on – are worth around a trillion pounds. Meanwhile, FSCS levies, the cost of the Money Advice Service and The Pensions Advisory Service expenditure is £700m per annum.
Is a practical, affordable solution staring us right in the face? The total cost could be covered by a relatively negligible seven basis points deduction from the total funds under management per annum.
The current need for PII could then be disposed of if adviser contributions went into the same fund to pool the risk. Excesses could still apply but, over time, the build-up of such a fund would almost certainly reduce contributions and help mitigate financial failure.
Problem solved. System fixed. Over-reliance on PII obviated. Long-term sustainability inbuilt. Greater certainty for consumers, advisers and product providers and no gaping holes in the funding strategy or ability for withdrawal of protection when most needed.
This may not be the right solution but if insurers continue to harden their position, or worse, remove cover for PI, it will significantly expose firms and clients to some drastic unintended consequences of the pension freedoms.
Consumers will be far better protected by active solvent firms, whereas, currently, the FSCS significantly limits the maximum compensation that can be awarded.
Something needs to be done and fast. If a solution is not found, advisers and clients will be at significant risk of financial failure and the confidence and trust of the public will be irreparably affected.
Keith Richards is chief executive of the Personal Finance Society