Financial advisers are finding it difficult to secure the insurance they require to be able to offer pension transfer advice, according to the Personal Finance Society (PFS), and this risks derailing the pension freedom reforms.
The trade body has told the Financial Times insurance companies are withdrawing cover for financial advisers providing advice on retirement arrangements.
Anyone looking to transfer a defined benefit (DB) pension worth more than £30,000 must obtain independent financial advice but PFS chief executive Keith Richards told the FT, professional indemnity insurers had begun to pull back from providing cover for advisers involved in pension transfer advice.
“The pension freedoms are in great danger of being derailed if [professional indemnity] insurers continue to overreact and withdraw cover for regulated advisers and their clients,” he said.
Highlighting the way “many” of the PFS’s 37,000 members have been running into problems, Richards told the FT of cases where an adviser was declined renewal of their professional indemnity cover, with the insurer explaining they were reducing their exposure to any future DB transfer claims. “The adviser then managed to secure alternative cover but at a significant hike in his premiums,” he added.
Last October, a Financial Conduct Authority report deemed fewer than half of the DB transfers it reviewed – where the recommendation was to transfer – to be suitable, while last month, a report by the Work and Pensions Select Committee on the British Steel Pension Scheme concluded some steelworkers had been “exploited for cynical personal gain by dubious financial advisers”.
Chris Jones of industry group the International Underwriting Association told the FT that providing insurance for financial advisers was “often thought to be more difficult than any other class of professional indemnity”. “There is a potential for substantial losses and there is a danger that cover can be considered as a product guarantee for failed investments recommended by the adviser,” he added.
Last week, RP’s sister publication Professional Adviser revealed PI insurers were putting financial advisers undertaking DB transfers under increased scrutiny by asking them to complete a supplementary questionnaire as part of their renewal process.