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PFS: IFAs consider abandoning DB transfer advice after FOS hike

Advisers are considering scrapping advice on defined benefit pension  transfers due to changes to the Financial Ombudsman Service compensation limit, the Personal Finance Society says.

The FCA has increased the ombudsman’s award limit from £150,000 to £350,000 on April 1.

PFS said that since the hike, financial advisers has contacted the professional body, saying they have experienced significant increase in their professional indemnity premiums.

This led these advisers to consider increasing charges as well as no longer offering DB transfer advice altogether, PFS says.

One adviser who contacted the PFS said their professional indemnity insurer increased their premium in order to remain FCA-compliant, but it meant their firm could carry only three more defined benefit transfer cases.

CISI warns FCA that rise in PI costs could damage small firms

The adviser was told their premium would increase from 3 per cent to 5 per cent of turnover and excess levels would be raised from £20,000 to £25,000 on defined benefit transfer cases.

The PFS quoted the adviser, who wished to remain anonymous, saying: “As a small firm turning over £200,000 a year and focused on only a few select clients this leaves us looking to cancel our defined benefit transfer permissions and seriously concerned about being able to obtain PII cover.”

Another adviser told the PFS their PI premium increases from £5,800 last year to £14,050 this year with the excess on DB transfers increasing from £5,000 in 2017 to £20,000 now.

A third adviser revealed last year PI had cost his business £6,700 but this year the premium was more than £27,000, despite the fact his company hadn’t advised on any British Steel pension transfers.

PFS chief executive Keith Richards says: “The raising of the FOS compensation is already having a material impact on the cost to operate for many firms whilst reducing access and the affordability of that advice, a key conflict with the Financial Advice Market Review objectives.

“The increased compensation limit is either stopping or driving financial advisers to consider no longer advising on pension transfers and therefore preventing people from being able to exercise their rights under pension freedoms which the PFS has raised with government.”

“The FCA considers allowing advisers extra time to make to think of arrangements for alternative professional indemnity cover in light of the ombudsman award increase. It also said it expects PI insurers to treat financial advisers searching for compliant insurance “fairly”.


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. The issue is, the cost is not just a one off premium. There is a cost every year, for every single DB Pension Transfer transacted.

    So you charge a client say £5,000 to complete a DB Transfer, but are then faced with an annual PI cost of £500 plus VAT every year thereafter that you are in business. This PI cost can increase as we have all seen substantially, accesses increased with no way to defend or change. So within a very short period of time the clients fee has actually left you with a liability, a liability that will cost you more than the fee charged. You will need to increase your Cap Ad to cover the increased access applied, so within twelve months that £5000 fee has cost you, not made you a return.

    Any business person with half a brain can see this is not sustainable long term.

    • Philip Castle 3rd June 2019 at 9:05 pm

      Every year since 2005 when we were established as a Ltd company I have thought about whether to apply for DB transfer advice permissions and every year, I have looked back at what happened in the 90’s with the Pension Review and whilst many firms have learnt their lessons and have pretty much bullet proof compliance systems, the problem has been potential PII problems even when you might have a bleamish free complaints record and I concluded and continue to do so, it would not be fair to either my staff or my clients for me to risk advising on DB transfers.
      My locum stopped advising on DB transfers nearly a decade ago, but it’s still a drain on his NEW clients as you have identified as the charge for the advice deducted a decade ago has been wiped out by the higher infinite liability of PI above that for me having never advised on DB transfers. Best thing he could do as a Ltd company would be to stop advising, pay PII runoff and come and work with me as a relationship manager!

  2. Andy Schleider 3rd June 2019 at 4:37 pm

    I think a lot of advisers are pulling out due to spiralling PI costs

  3. The proximate cause of all the problems is bad government, in my opinion. We need a new electoral system and new lawmakers. Ones who listen to consultations, for example.

    • Philip Castle 3rd June 2019 at 9:07 pm

      Platying politics with what should be based on legal precedent (i.e. FOS decisions should both follow and set precedent and then a rule/law change would be required once precedent formed. FOS is a terrible distortion of the gradual improvements in the British legal system seen over several 100 years and move towards Roman style law.

  4. Barney Cooper 3rd June 2019 at 5:12 pm

    The solution to this problem is very simple. Do not give clients dodgy advice for which you can be sued. Stick to the rules.

  5. A very interesting development and very good of Keith Richards to point this out.

    It will be interesting to see if the FCA looks more aggressively at transfer advice in years to come. A retrospective review of one or two firms may be beneficial.

  6. Julian Stevens 3rd June 2019 at 9:15 pm

    The thing is, though, that the FOS only looks at complaints in respect of which a claim for compensation, perhaps in the first instance as high as £350k, has been rejected by the PI insurer.

    So what the PI insurers are really concerned about is not the new £350k limit per se but the fact that the FOS might overrule their rejection of a claim for such an amount and order payment not of £150k but of anything up to £350k.

    As I see it, that doesn’t reflect at all well on PI insurers, already reviled for their practice of withdrawing cover in respect of advice for which they were being paid at the time it was given. Alternatively, a new insurer might well refuse to provide cover in respect of past advice, leaving the poor adviser high and dry.

    • “As I see it, that doesn’t reflect at all well on PI insurers, already reviled for their practice of withdrawing cover in respect of advice for which they were being paid at the time it was given.”

      They were being paid for cover on a claims arising basis. If you want a different kind of cover then you need a different kind of policy – which probably isn’t readily available and if it was would cost a lot more. Lambasting insurers for this is a cheap shot. It’s like spending Renault money to get a Renault and then complaining you didn’t get a Mercedes…

  7. Christopher Petrie 3rd June 2019 at 9:55 pm

    I have permission and qualifications for DB transfers.

    Unfortunately however, the market and legislation and insurance requirements have become so onerous that, as others have said, even sound advice cannot be made on a profitable basis.

    By even conducting DB cases, no matter how well done, the PI insurance premium increases so greatly that the charges to the client cannot possibly cover those costs.

    I have concluded that’s it’s no longer possible for a business to write DB transfers on a profitable basis. Nor would I want to risk my company to the hassle of claims management companies in the future, as they tout for business.

    Sorry, but I can’t see how I can do this class of business.

  8. The PFS and certainly Keith, must know this is exactly what the FCA wants and its reduction by design.
    Crikey, Bailey admitted as such in a recent presentation.

    They (FCA) have used this tactic before, and with great effect, reduce availability and you reduce output.
    IMHO, they believe those left, in the market have…. very deep pockets (so can pay for their mistakes), and have self belief, that their systems and process makes their advice and recommendation bullet proof.

    The problem with this is the FCA are so blinkered they fail to see any key variables, or unintended consequences….we all know what lurks in ones peripheral vision, the monster peaking through the crack in the curtain, you know its there but you cant quite see it.

    It does not give two hoots about PI, process, systems or indeed the county east of London, because they know any reduction in the supply chain creates opportunity.
    This is why time and time again we see very large sums of money whisked away by very few individuals in a very short space of time.

  9. Scott Keachie 6th June 2019 at 1:18 pm

    The simplist solution would be for the IFA community to abandon the PI market, and create a master trust, where all current PI premiums are paid.

    Create an indistry wide self-insured fund.

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