The Financial Conduct Authority (FCA) has said the inability for firms to compensate consumers via their professional indemnity insurance is “unfair”.
In a ‘Dear CEO’ letter published on Tuesday (21 January), addressed from FCA director of life insurance and financial advice supervision Debbie Gupta, she said the transfer of these compensation costs to other market participants via the Financial Services Compensation Scheme (FSCS) levy places an unnecessary burden on other firms.
“It also threatens confidence and participation in financial services market,” she added. She said the FCA was concerned some advisers were holding “inadequate” financial resources and professional indemnity insurance (PII) for the business activities they carry out.
“This has been an issue with a number of the firms assessed as part of our work on DB [defined benefit] pension transfer advice,” she said. “We have seen cases where firms have exclusions for particular business lines (such as providing advice on DB transfers) or have sub-limits on particular business lines below the minimum requirements.”
Gupta said the FCA will be focusing on whether advisers have adequate financial resources and PII as part of its ongoing supervisory work and said advice firms must meet the financial resources requirements set out in its Interim Prudential sourcebook: Investment Business.
The regulator said it aims to publish a report setting out the results of the review “in 2020”.
On Monday (20 January), the Personal Finance Society said more than 30 advice firms turned their backs on offering pensions transfer advice from October to December 2019 2019 due to problems obtaining PI cover.
Since the FCA lifted the Financial Ombudsman Service (FOS) compensation limit from £150,000 to £350,000 in April last year, some advisers have struggled to afford PI cover.
To add insult to injury, last week (16 January) the FSCS announced it would raise its overall levy to £635m for 2020/21, with intermediaries stumping up £213m of that cost. The total levy was up by £85m on the previous year and the lifeboat scheme blamed increased self-invested personal pension (SIPP) operator failures for the rise. FSCS will confirm the final levy in April 2020.
In response to the letter, former FCA man Rory Percival was surprised the hear the FCA’s claim that cases of consumer harm in the advice process are increasing. The regulator outlined its approach to tackling key areas of concern linked to adviser firms and actions advisers should take this year and said it was “seeing a number of cases where the actions of firms are resulting in significant harm to consumers financial wellbeing”.