42% of DB transfer advisers could leave market within 12 months

Just 58 per cent of advisers working in the defined benefit (DB) transfer market were convinced they would still be in the market in 12 months’ time, according to Royal London.

A survey of advisers from the firm, which was published in cooperation with Lane Clark & Peacock (LCP) in the Helping Members Access DB Transfer Advice policy paper, found that 8 per cent did not think they would still be in the market, while 34 per cent did not know.

The report warned: “At the time that the survey was undertaken, the Financial Conduct Authority (FCA) was yet to publish its final rules on DB transfer advice, and this has now confirmed the abolition of ‘contingent charging’ – a charging model used by many advisers. It seems likely that this could tip a significant number of the undecideds into leaving the market.”

Among advisers who had stopped offering DB transfer advice in the past three years, 81 per cent said the decision had been at least partly due to issues with Professional Indemnity (PI) insurance, 42 per cent said it was outside their firm’s risk appetite and 40 per cent cited the level of regulatory scrutiny.

The report noted that PI insurance costs had spiralled due to an increase in the number of DB transfers, regulatory scrutiny and the FCA increasing compensation limits from £150,000 to £350,000.

LCP and Royal London cautioned that the exodus from the DB transfer advice market could mean those seeking to move their retirement savings are more likely to struggle in finding sound advice.

The report stated: “Later in 2020 financial pressures on households because of the current economic crisis may lead cash-strapped over-55s to look very closely at their DB pots as a way of accessing relatively large amounts of cash relatively quickly.

“If we are to see a new wave of interest in DB transfers, it is especially important that those members are able to access good quality advice at a price they can afford.”

The report found that a “small majority” of the firms which had dropped out of the market in the last three years would consider re-entering, with many calling for regulatory certainty and affordable PI cover.

Considering the PI insurance issue as the key, the report listed several options that might encourage insurers to provide cover at more affordable prices.

First it was proposed that alternative methods of providing cover were identified by insurers, then the creation of a tighter regulatory regime and punishments for rogue advisers, and then a consideration of whether advisers should only advise on regulated investments.

The report said: “The message from advisers surveyed for this paper is clear. They are looking for regulatory certainty and a solution to the issue of apparently ever-increasing costs for PI insurance.

“It is hard to escape the conclusion that the current market for PI cover is broken and new models need to be explored.”

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