Financial professionals

In this chapter of our Annual Insurance Review 2018, we look at the main developments in 2017 and expected issues in 2018 for financial professionals.

Key developments in 2017

2017 has seen considerable activity in the financial services market. There have been three key Financial Conduct Authority (FCA) publications impacting the financial advisory market:

1. second consultation paper on funding for the Financial Services Compensation Scheme (FSCS) and reviewing the adequacy of personal investment firms’ professional indemnity (PI) insurance;
2. consultation paper on changing the rules for defined benefit (DB) pension transfer advice; and
3. updated guidance on the methodology for calculating redress for DB pension transfers.

Of key concern were the FCA’s proposed changes to increase personal investment firms’ PI insurance requirements, ostensibly with a view to reducing the costs of FSCS funding. RPC was involved in consulting with the FCA and putting forward a response on behalf of a number of participants in the PI insurance market. Following publication of a second consultation paper, the FCA is no longer considering changes to PI insurance (focusing only on exclusions for policyholder-related insolvency).

The FCA is still considering its proposed changes to the rules for provision of DB pension transfer advice,but the wider advice market is impacted by the FCA’s position on the risks of outsourcing pension transfer specialist advice, where we have seen a number of section 166 reviews take place. Delegating of aspects of an advice process to a different adviser (often driven by a firm’s permissions) is an area attracting regulatory action and consequent liability for firms and their insurers.

The now finalised updated methodology for DB pension transfer redress is broadly likely to increase redress sums when unsuitable advice is found. Other broad areas that have been particularly active during 2017 are claims against Self-Invested Personal Pension providers, and claims linked to unregulated introducers and alternative investments.

What to look out for in 2018

Pension transfer advice will remain in the headlines during 2018. The FCA’s proposed changes to DB transfer rules under the Conduct of Business Source book are set to be introduced in early 2018. However, those changes do not include the delegation of pension transfer advice, which we expect to continue to attract scrutiny and claims.

Intermediary relationships are also likely to be key for 2018, as the FCA warns firms to improve due diligence and monitoring of business from introducers and appointed representatives. The FCA’s focus is widening from unauthorised introducers to execution-only providers (where claims are currently active). We predict a further increase in claims holding firms responsible for intermediaries’ actions.

Discretionary Fund Managers (DFMs) may see increased claims and exposure to systemic risk in 2018.Several DFMs ceased business in 2017 following the FCA’s scrutiny of model portfolios, a cost-effective and popular option for retail customers. Systemic issues may lead to regulatory activity including reviews of business resulting in potential civil liabilities.

Regulatory and investigatory costs (plus management liabilities) add pressure alongside claims, and this is likely to continue following the implementation of the Senior Managers and Certification Regime across financial services in 2018. This is going to affect not only those in the financial advisory industry but also claims managers.

Download our full Annual Insurance Review 2018 for more insights.