Financial advisers who are carrying out a lot of defined benefit pension transfers will notice that their professional indemnity insurance is being reduced. What are the implications of this?
DB Pensions Explained
According to the Money Advice Service, defined benefit pensions pay out a secure income for life, which increases each year. Staff working in large organisations or the public sector are more likely to have a defined benefit pension. The scheme works by an employer, and often the employee, making contributions to the pension pot to ensure that there is enough pension income at the time of retirement.
Professional Indemnity Insurance Limits
Insurance companies have taken notice of the risks associated with defined benefit pension transfers and have reacted by putting a limit on professional indemnity insurance coverage for financial advisers. This limit is now being set at £500,000. It is applied across the life of a policy as a way to avoid exclusion.
Prior to this coverage capping, financial advice firms would have had full access to professional indemnity insurance cover, free from any restrictions. The limit was a very generous £1.75 million.
Consequences of £500k Limit
These new changes will have quite an impact on the financial advice sector. Those firms that receive compensation claims in excess of this limit, with regards to defined benefit pension transfer advice, will have to pay this extra themselves. If they are not in a position to do this, they have two options: declare themselves bankrupt or seek financial assistance from the Financial Services Compensation Scheme.
With many financial advice firms getting to grips with new data protection laws, often requiring an upgrade in software for IFAs, such as that from intelliflo.com, these new insurance rules mean there will be even more things they now need to consider with their advisory services.
Finance experts reckon that the £500,000 insurance limit will actually only cover one or two claims. It will cause a real headache if there is a bigger problem with any advice given. The reality is that many firms would just not be able to afford the compensation claims. This could have a huge impact on the financial advice industry, with the Financial Services Compensation Scheme probably shouldering a lot of the burden.
Certainly when it come to indemnity insurance policy renewal time, many financial advisers will be concerned.