Industry experts have suggested the Financial Conduct Authority’s plans to increase the FoS complaint compensation limit to £350,000 (from the previous limit of £150,000) could mean Professional Indemnity cover becomes much harder for advisers to secure.
This limit increase, unveiled as part of a move to extend the Ombudsman’s services to Small and Medium Enterprises (SMEs), has caused worries that the raise will result in professional indemnity premiums increasing, which could in turn push some insurers away from this particular market.
The FCA has previously mentioned concerns that the PI market is too small, with only around 10 to 15 firms actively offering this type of cover. If these FCA plans to increase the Financial Ombudsman Service’s limit come to fruition, it could add to existing problems dealt with by advisers currently operating in the defined benefit (DB) transfer market.
Some firms have already faced difficulty obtaining cover, while others have seen their coverage level cut to £500,000. Keith Richards, the current Chief Executive of the Personal Finance Society, has voiced confusion on how the FCA could make moves which harden the PI market when they claim to want to increase access to good financial advice.
Richards said: “The FCA’s proposed changes to the FoS compensation limit throws into stark question whether there is any joined up thinking between them, the government and the market. Recent concerns surrounding DB transfers, which sent PI Insurers running for the hills, has already left many advisers facing increased premiums, increased excesses and in some instances, no ongoing cover. The market continues to harden with increased costs being experienced across the sector. This move by the FCA will compound the issue and can only be described as reckless.”
The FCA have said it expects the bulk of any increase in premiums would be offset by a reduction in the level of compensation that is directly placed on firms, but in its recent paper on raising the compensation levels of the FoS, the regulator conceded that it was aware that PI premiums may also raise in response to the compensation limit going up. The FCA also admitted that for a number of small firms, these are already “relatively high” as a share of total income and that further increases may have a “significant effect”.
It remains to be seen just how significant this effect would be, but if we assume the percentage of claims costs in relation to premiums earned by insurers was around 63%, this could result in an overall insurance cost increase of £77m for firms. The FCA has said it expects the actual figure to be lower than this, as not all claims are insured or fully insured, but has acknowledged the issue as a key one and has requested specific feedback on the matter.
Comment from the Pension Justice team: “This is a very welcome development that serves to increase consumer protection for those who have been victims of bad pension advice. The FSCS has already indicated it proposes to increase the level of compensation for claims against bad advisors who go into default after 1 April 2019 from a sum of £50,000 to the sum of £85,000.”