The FCA will push ahead with its plan to raise the FOS award limit to £350,000 despite warnings from insurers that advisers’ PI costs could rise by as much as 500%

Sir Steve Webb calls this “shocking”

the risk is that the insurance which advisers are obliged to buy will more than double in price and could drive up to a thousand firms out of the pension transfer advice market altogether.  

I say it is precisely the shock that advisers need. They have been sleep-walking into a crisis for some time and they should read this blog rather than be egged on by Sir Steve!

There are a few financial advisers (notably St James Place) big enough to self-insure against claims, but most are insured by third parties – usually through Lloyds syndicates.

The FCA estimates that the increases will be confined to high-risk firms. But insurance doesn’t necessarily favour the good and penalise the bad. Underwriting is limited and risks are spread, the good advisers will pay for the bad.  This statement from the FCA seems to ignore this reality.

It (the FCA) said the high estimates were based on data from its targeted supervisory work ‘that is very likely to significantly overstate the proportion of higher-risk firms in the market as a whole’.

It added: ‘We have not been able to reconcile such increases with our estimates of additional liabilities. We assume they reflect factors that are not accounted for in our model (because they are not due to the increases award limit) such as challenging market conditions or the apparent lower profitability of this class of PI insurance.’

This is a problem to do with underwriting as much as regulation and this article sets out a simple solution to the underwriting problem

How to properly underwrite this market

There is a very simple way of solving the problem. Most DB transfers go ahead after something called triage (a medical term designed to filter out the well from the dying).

Advisers filter out the chancers – transferees looking for their money now and redress later from those with serious intent to reshape their retirement benefits using a CETV.

The simplest test to short the chancers from the serious is to charge everyone a flat fee to see whether a transfer is feasible and to be recommended. This fee could be set by the adviser but should be paid up front in cash (with VAT). It should not be discounted from the advisers normal chargeable rates (representing a full recovery on published rate-cards). I would very much doubt that any advisor would want to charge less than £2k for an initial assessment.

After that assessment is made, then I am comfortable that execution is conducted through a combination of adviser charging on the fund (the initial set up cost) and an ongoing charge on the assets – representing  value add from the adviser.

If I was an insurer…

If I was a PI insurer , I would not take on any risk that had not been properly managed by my client (the adviser).

I would make it plain that a no-win no fee basis of transfer was not an acceptable way to mitigate risk and I would make sure that the initial fee charged to the client represented proper risk mitigation (eg chancers were not allowed through the door).

I repeat again that if people wanting to take a transfer cannot raise a minimum sum (effectively risk capital) to ensure that the transfer is suitable, they are not a suitable candidate for transfer. The bar has to be high enough to make this a self-selecting exercise.

What are the FCA up to?

The FCA aren’t dumb. They know the insurance market well enough to know it will find a way to underwrite

I have given it a suggestion.

The FCA aren’t dumb, they know that IFAs do not want to put their businesses at risk but they do want to serve their clients. My suggestion should be acceptable to most IFAs.

The FCA aren’t dumb and they know that this decision will turn the screws on the self-insured that still operate under contingent charging.

What the FCA is up to, is systematically tightening the supply side tap, making it harder for people to transfer out of DB plans without preventing their rights to do so.

PI insurers and IFAs need to think a little wider than how to absorb this new risk into their contingent charging model. They should wake up and smell the coffee. No adviser wants to be the last on the Contingently Charging Titanic!