UK financial advisers have passed the burden of rising regulatory costs onto clients looking to take advantage of pension freedoms, a recent study has revealed.
The Personal Finance Society (PFS) surveyed 1,049 members and found 80% of those who no longer offer transfer advice on defined benefit (DB) schemes unsurprisingly claimed that they left the market because couldn’t obtain professional indemnity (PI) cover or that it was too costly for them to keep it in place.
One adviser, who wished to remain anonymous, said: “I had to stop offering DB pension transfer advice two years ago because, despite zero complaints and every client being satisfied, the rising costs of PI, restrictions, and increased capital adequacy requirements, plus the lack of a long-stop, priced us out of helping clients in this area.”
But of the advisers that are still able to work in the space, 40% said they were forced to increase the fees they charge for DB transfer advice, as a result of surging PI costs.
Nearly all of the professionals surveyed (95%) claimed their PI premiums have increased in the last five years, the PFS found.
Two thirds reported a rise greater than 25%, while under a quarter (23%) said their premiums have soared by at least 76% compared to what they were paying before pension freedoms were introduced.
‘Likely to get far worse’
Keith Richards, chief executive of the PFS, said: “The pool of financial advisers able to offer DB pension transfer advice has been shrinking at a scarily fast pace, and the numbers who will have to increase the fees they charge is set to increase against a backdrop of increasing regulatory levies.
“I am sorry to say access to affordable defined benefit pension transfer advice is likely to get far worse for consumers unless we see some sensible government intervention soon and the increased risk exposure, where PI cover for past DB advice has ceased, will compound the already unsustainable Financial Services Compensation Scheme (FSCS) costs for all.”
Richards gave the example of a small IFA firm which, in 2017, paid £28,250 for PI and £19,291 in FSCS levy.
The following year it had to cash out £67,725 ($93,682, €77,258) and £33,200 – a 239% and 172% increase, respectively.
He added: “Clients will ultimately have to pay more, but many firms have either absorbed the increase or are trying to reduce costs elsewhere – through the use of technology and lack of travel this year – rather than fully passing it on to clients.
“Financial advisers can’t absorb these increases forever however, and the need for a stable financial advice market has never been more important. The current method of funding consumer compensation is unsustainable, which even government and the Financial Conduct Authority (FCA) have acknowledged recently.
“We continue to call for government intervention before the number of people struggling to access pension transfer advice at a price they can afford grows even greater and the evident wider impact gets worse.”
