Clive Goldthorpe: Soaring PI insurance costs are the most effective way to clamp down on DB transfers

The DB transfer market has been put in sharp focus after the FCA unveiled a series of new measures that will make it even harder for advisers to carry out switches for clients.

In fairness, given the evidence the regulator gleaned from its own work with adviser firms, it probably had little option but to introduce new rules, which include banning contingent charging on DB transfers from October this year.

The FCA found flaws with a high percentage of files - some 17% of cases were found to be unsuitable while many more had incomplete information, figures we can all agree are unacceptably high.

While forcing customers to pay for advice upfront rather than out of the value of said pension pots will definitely put the brakes on some transfers, what the changes have really done is give insurers yet more reasons to close their books on this area.

The FCA's review - and the amount of errors they found - suggests there will be many claims coming down the line that will ultimately land on the PI insurers.

To prevent their work in the sector becoming unprofitable, PI insurers are now looking even more closely at a market that was already under scrutiny, and the most likely outcome from here is that we see premiums for anyone operating in this space go up again.

How high they could rise is difficult to be exact on, especially as premiums have already rocketed for many advisers, but a continuation of the upward sloping curve we have seen in recent years is a fair assumption.

As premiums rise, so will restrictions. If you can't get insured, you can't operate, so rather than an outright ban from the regulator, which can have unintended consequences, these changes will nonetheless effectively achieve that because few insurers will want to provide cover for such transactions. Indeed, we may reach a stage where only the largest firms and networks are able to offer these services in future, although we are not at that stage yet.

Some advisers will argue that the FCA's moves here are restricting choice for consumers by limiting the scale of the advice they are offered.

It's a fair point on the face of it, but the reality is this is about suitability, not restricting advice. If the regulator had found fault with 10% or fewer cases, it is unlikely it would be acting in this way, but instead it has found far too much evidence of a problem in this space.

In truth, many firms would probably privately agree that this was already a high-risk area to operate in, and the FCA's move is simply another nail in the coffin.

It's also hard to argue that having a handful of the biggest firms, with their own specialists in this field (and the deepest pockets in terms of reserves to cover any claims), are still able to do this type of work is anything other than a sensible outcome.

As for the insurers, this will be just one of many storms coming their way now following a ten-year bull market. Indeed, it's a good time for them to be strengthening balance sheets and their actions make sense.

Unfortunately for advisers, they are a captive audience. It is unlikely, especially given the latest action by the FCA, that more insurers look to enter the adviser market to provide cover, so the ones still providing insurance are in the driving seat.

Advisers will have to accept that to keep operating, higher premiums are simply the cost of doing business.

Clive Goldthorpe is chief operating officer at Beaufort Financial

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