As a financial planning firm, the Financial Conduct Authority (FCA) requires us to hold Professional Indemnity insurance (PII). This is to make sure that we have the means to pay negligence and other claims and to help prevent insolvencies leading to excessive claims on the Financial Services Compensation Scheme (FSCS).
Recently, we have had to renew our PII. As many firms struggle with increased premiums or restrictions regarding the type of advice that they can provide, we’ve had few problems in renewing our cover. Here’s why.
How our approach benefits clients
It’s nice when you get recognised for doing the right thing! This is what happened to us over the last month with the renewal of our PII, including retaining the permission to advise on Defined Benefit (Final Salary) pension transfers.
However, this hasn’t been a quick win, but rather a testament to the procedures we put in place when Pension Freedoms were introduced in 2015.
Not all firms have been able to renew their cover quite so easily. In recent weeks, the financial press has been full of headlines such as:
- “Hundreds of advice firms give up DB permissions” (FT Adviser, 5th June 2020)
- “Adviser sees 430% PI hike after three [pension] transfers” (FT Adviser, 27th May 2020)
So, what do we do differently?
One of the main things that helps us is the fact that we are a financial planning business where we fundamentally align our long-term interests with that of our clients. We do not do one-off pieces of transactional work, and this enables us to plan over the longer term.
There is no desire among our advisers for a ‘quick win’ off the back of clients jettisoning the secure benefits of a Defined Benefit pension scheme in exchange for greater funds under management.
Engagement with the regulator is also essential. As a business, we have the experience of understanding where the regulations are leading us so that we can ensure that our processes are built with this outcome in mind. We don’t reactively adapt to regulatory change.
It is for this reason that, from day one, we have always charged a separate fixed research fee for undertaking Defined Benefit analysis, payable in advance and payable regardless of whether the ultimate advice is to stay a member of the scheme or not.
It is interesting that, on 5th June 2020, the FCA announced a ban on contingent charging for Defined Benefit advice. Again, we were ahead of the curve on this issue.
Why our unique approach has paid dividends
In addition to this, we have never accepted referrals from firms who simply want to use our Defined Benefit permissions. We’ve also never undertaken transfer analysis for a share of ‘commission’ or referred our clients to other third parties to avoid giving transfer advice.
At times over the last few years, it has seemed like we were the anomalies; that we perhaps weren’t being as ‘commercial’ as we could be and that we had allowed compliance to be too overbearing.
However, by taking this approach we have been able to secure PII renewal terms with unrestricted cover. As a firm of independent financial planners, this is central to the service we provide. Our clients expect us to be able to advise on all areas.
If the right advice is for a client to transfer out of a Defined Benefit pension arrangement, we want to be able to give that advice and to be responsible for doing it in the way it should be done.
Conversely, given how we have aligned our interests, if the best advice is that a client remains a member of a scheme, that’s what we will advise. In the majority of cases, this is still the most suitable advice.
We’re well placed to continue to provide holistic financial planning
The next few years will see a significant change in the market. The number of firms retaining the permission to advise on Defined Benefit transfers will fall, either as a result of them being forced out of the market because of regulatory pressure from the FCA or simply because they can’t secure the appropriate PII.
In addition, many firms will see an increase in their minimum capital adequacy requirements. They will be obliged to set aside more cash as historic advice on pension transfers is no longer covered under their PII.
So, why does all this matter to you?
If you deal with one of these firms – with no PII cover and the maximum award for redress under the Financial Ombudsman Service now being £355,000 – any single claim could result in the firm being financially insolvent.
To the great majority of people, remaining a deferred member of a Defined Benefit pension is still the most suitable course of action. The availability of a secure index-linked pension for the remainder of their (and their financial dependent’s lifetime) can be a massive financial bedrock for any future financial plan.
Ask all those clients whom we have advised in the past to retain Defined Benefit pensions about the security they have felt over the last few months considering the volatility of the global equity markets!
However, for some, the opportunity instead to secure significant wealth for the next generation via a pension transfer may be equally important.
Get in touch
There is no right or wrong answer and as always, the correct advice will depend on individual circumstances.
However, what will not change is the importance of dealing with an adviser who aligns their interest with yours and knows the value of doing the right thing. It is nice that we now have independent proof of this with the endorsement of our PI insurer.
To find out what we can do for you, please email firstname.lastname@example.org or call 0121 313 1370 to book your chat with a Chartered financial planner.