Advice on defined benefit (DB) transfers from the British Steel Pension Scheme (BSPS) is now being excluded from some professional indemnity (PI) insurance policies, New Model Adviser® understands.
Ten firms suspended their DB transfer permissions following intervention from the Financial Conduct Authority (FCA) over BSPS. The first firm to do so, Active Wealth (UK), entered liquidation in February.
Advisers have been facing increasing costs for PI insurance as a result of wider issues regarding DB transfers, with one pension transfer specialist firm being forced out of business due to lack of an acceptable PI quote.
PI insurers are now listing BSPS transfer advice alongside infamous scandals Arch Cru and Keydata as 'absolute exclusions' on their policy renewals, according to a source within the PI broking market.
Insurers are also introducing an 'inner limit' for general cover on DB transfers of £500,000, compared to the £1.85 million minimum cover required for an IFA firm.
In some cases, policies have also added excesses of around £15,000 for DB transfer claims.
A source with knowledge of the situation said: 'On one policy renewal I've seen, you have a DB transfer limit of indemnity of £500,000 and the increased excess, but there is then a further exclusion on the policy referring to the BSPS.
'The next level down is "we will exclude all claims and circumstances arising from any defined benefit transfers undertaken from the BSPS".'
The policy listed only Arch Cru, Keydata and British Steel as 'absolute exclusions', the source confirmed, adding: 'I think they are looking at British Steel as a car crash. The "absolute exclusion" means that if you phone them up and mention British Steel, they'll just say "it's nothing to do with us", there'll be no defence, no payment of legal costs to dig you out of a hole.'
So far, 29 claims have been brought to the Financial Services Compensation Scheme (FSCS) relating to collapsed IFA Active Wealth (UK).
The FSCS has set aside £10 million to deal with claims against a number of IFAs including Active Wealth (UK), and last month announced a £52 million increase to the levy on life and pensions advisers.
In response to the BSPS exclusions, FSCS chief executive Mark Neale said: 'This clearly limits the capacity of PI insurance to absorb some of the liabilities and claims that may arise and makes it more likely that FSCS will be called on.
'I think there is a trade-off between the robustness of PI insurance and the triggering of FSCS. FCA has indeed looked at this as part of the FSCS funding review, and the more you ‘beef up’ PI policies, the more expensive they become for the industry up front, but they are more likely to absorb claims that would otherwise fall on the FSCS.
'The less robust the policies, the cheaper they are, but the more likely FSCS is to substitute for PI policies. I don’t think there’s an easy answer to that question. You can’t get away from that trade-off.'