Last month I had the pleasure of being invited to the Business Leaders Forum, featuring several leading firms from the South of England. With a drop-in from Keith Richards, chief executive of the Personal Finance Society (PFS), the group discussed everything from professional indemnity (PI) cover, to defined benefit transfers, and the press that surrounds the advice sector.
There was so much ground covered it was impossible to do it justice in just one article, so I am writing three.
I will kick off with that hot potato, PI cover as this has been a topic brought up with us constantly over the past year as we toured the UK speaking to advisers.
It was no surprise that the group discussion, held at the Charles Stanley offices on Bishopsgate, began with further analysis of the current situation.
The big PI problem
The crux of the situation appears to be as follows; the market for PI cover is a small one, with the list of providers being anything but expansive. There is also an imbalance of power, stacking the odds against the adviser. This imbalance comes about as advisers are absolutely dependent on their insurers if they intend to conduct any authorised business. On the other side of the fence, insurers do not need anything from advisers. The common perception is that they view advice as a relatively small market in terms of overall size, if not individual premiums.
In short, this is business that PI insurers want, but do not need, and we should not be entirely surprised that advice firms of all sizes feel that they are charged too highly and possess limited bargaining power.
This presents a problem for IFA firms, especially those who are taking on defined benefit (DB) pension transfers. Leon Thompson, director of Jigsaw Compliance Services, told of an advice firm he knows whose PI insurer withdrew a mere two weeks before the insurance renewal date. Why? Because a new pension transfer specialist had been hired, taking the number of DB transfers from 26 to 80 in a short space of time.
While it is true some advisers will not touch DB transfers with a bargepole, there is every reason to feel sympathetic in this case. ‘They’d had no complaints, everything had been smooth, they had shown the workings of everything they’d done, and everything was properly checked,’ said Thompson.
The firm in question was eventually able to renew with a different insurer, albeit for four times the previous cost, and only after conversations with six other providers who expressed no interest in taking on the policy.
The broker who was willing to engage, as it happens, recommended an 18 month renewal rather than 12 months, owing to the level of unease in the PI market towards DB transfers. Some readers will agree with the mentality of the brokers here, and yet there are many IFAs who carry out DB transfers diligently who will be wondering what they can do to get a reasonable deal. If clear workings and a perfect track record are not enough, then what is?
The answer may well have been provided by Chris Masters, principal partner of Beaufort Financial in Reading. ‘Our PI insurer said they’d help us write the policy on DB, and we’ve had them involved since day one, so it’s their policy as much as ours.’
Masters explained that the insurer points out all of the areas of concern, allowing for a better understanding between the two parties. ‘They’ve helped us write the whole thing. We told them our end-to-end procedure and they gave us feedback,’ he adds. The result? ‘They’ve dropped premiums now because they’ve seen that we do the things that we say we’ll do.’ This might provide food for thought for firms who are having difficulty finding PI cover.
All in all, it seems as though the relationship between advisers and PI insurers is tricky but not unmanageable. The collaborative approach clearly has merit, although I wonder how many insurers are willing to work on this basis. Insurers have a central role to play if authorised firms are to continue providing pension transfers, but this is new territory and as such there is no real template for how to provide cover. It is also worthy of consideration that PI insurers, in a sense, have the power to shut down the market for DB transfers. That is in no way to say that they will, however, but may get people wondering if there are viable alternatives to PI insurance.