An inability to get affordable professional indemnity (PI) insurance is the primary reason why financial advisers have stopped offering defined benefit (DB) transfer advice, with premiums soaring or cover not even available for advisers who had never had a complaint.
A survey of 1,049 Personal Finance Society members in February found eight out of 10 of those who do not currently offer defined benefit pension transfer advice used to be able to. One small firm had seen a 239 per cent increase in PI cover.
A total of 95 per cent of financial advisers surveyed said the price they pay for professional indemnity insurance had increased in the last five years. Two thirds of financial advisers polled said the cost of professional indemnity insurance has increased by more than 25 per cent in the last five years with 23 per cent reporting premiums were more than 76 per cent dearer than they were prior to pension freedoms.
Four out of 10 financial advisers stated the price they charge for defined benefit pension transfer advice has increased over the last two years. Many said they had only marginally increased their advice fee.
One anonymous financial adviser stated: “I had to stop offering defined benefit pension transfer advice two years ago because despite zero complaints and every client being satisfied, the rising costs of PI, restrictions and increased capital adequacy requirements plus the lack of a long-stop priced us out of helping clients in this area.”
Personal Finance Society CEO Keith Richards says: “The pool of financial advisers able to offer defined benefit pension transfer advice has been shrinking at a scarily fast pace and the numbers who will have to increase the fees they charge is set to increase against a backdrop of increasing regulatory levies.
“I am sorry to say access to affordable defined benefit pension transfer advice is likely to get far worse for consumers unless we see some sensible government intervention soon and the increased risk exposure where PI cover for past DB advice has ceased will compound the already unsustainable FSCS costs for all.
“Too many financial advisers have seen PI premiums soar over the past few years. A small IFA practice by way of example has seen PII cost of £28,250 and FSCS levy of £19,291 in 2017 to 2018 increase to £67,725, +239% and £33,200, +172% respectively.
“Clients will ultimately have to pay more but many firms have either absorbed the increase or are trying to reduce costs elsewhere (through the use of technology and lack of travel this year) rather than fully passing it on to clients. Financial advisers can’t absorb these increases forever however and the need for a stable financial advice market has never been more important.
“The current method of funding consumer compensation is unsustainable which even government and FCA have acknowledged recently. We continue to call for government intervention before the number of people struggling to access pension transfer advice at a price they can afford grows even greater and the evident wider impact gets worse.”
Instead of consumer compensation being paid from the current patchwork of professional indemnity insurance and levies to the Financial Services Compensation Scheme, the Personal Finance Society has proposed an alternative which would combine both.
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