I’m a financial adviser – why have my professional indemnity premiums reduced?

If you’re a financial adviser, we can imagine you’re pretty pleased to have seen your premiums reducing over the last two years – especially as they steadily increased between 2018 and 2024 – but you’re probably wondering why.

Ultimately, the tide is turning as a direct result of Financial Ombudsman Service (FOS) and Financial Conduct Authority (FCA) changes that previously spooked insurers.

Fortunately for you, gloomy forecasts of more and bigger claims haven’t played out, but what were the changes and why have they impacted your professional indemnity insurance (PII)?

Increased compensation awards limits

In 2019, the FOS significantly raised its maximum compensation award, effective from 1 April 2019.

For complaints concerning acts or omissions on or after 1 April 2019, the cap increased from £150,000 to £350,000. For complaints about events before 1 April 2019, referred to the FOS on or after that date, the cap rose from £150,000 to £160,000.

Additionally, from 1 April 2020 these caps have been automatically indexed yearly by Consumer Price Index inflation.

Previously the maximum FOS could award was £150,000 so you can imagine the concern amongst insurers seeing almost a three-fold increase. The result…your premiums increased and continued to increase year-on-year.

In reality, despite the FOS having greater authority to issue sizeable awards and doing so, the impact for insurers has been less severe than predicted, meaning your premiums are now falling. But that’s not the whole picture.

Concern over defined benefit pension transfers

The default regulatory position on defined benefit (DB) pension transfers is that it’s not suitable for most people. Evidence that consumers have been advised to transfer when it’s not in their best interest caused concern at the FCA because:

DB pensions offer guaranteed, inflation-protected income for life that is difficult to replicate with a defined contribution (DC) scheme.
Transferring out of a DB scheme exposes individuals to investment, longevity and inflation risk, which they were previously shielded from.
Some advisers are motivated to recommend transfers because they can charge large upfront or ongoing fees.

How the FCA responded

In response to their concerns, the FCA made it very clear that DB pension transfers would be scrutinised. They conducted multiple reviews and introduced a ban on contingent charging from October 2020.

These changes unsettled insurers who predicted financial advisers being forced to retrospectively review their advice and proactively offer clients compensation. Unsurprisingly, the result was higher premiums, particularly for those advising on a lot of transfers.

What changed?

Two things have helped to settle the nerves of insurers.

Firstly, the FCA announced a redress scheme to compensate members of the British Steel Pension Scheme. Whilst this also resulted in firms being scrutinised by the FCA, a broader redress of all DB pension advice was not ordered by the FCA as some had feared.

Secondly, gilt yields began to rise, reducing the transfer out values. This helped reduce the number of viable transfers and naturally volumes declined. It also created a dynamic where those that transferred out during 2019-2020 received a soaring transfer value, effectively reducing the likelihood of a financial loss, assuming the transfer receipts had been carefully invested.

A positive trend ahead

For financial advisers, this is a positive development. Not only are your premiums reducing, it also indicates the industry is moving in a direction where better compliance and consumer protection are at the forefront, leading to fewer legal disputes and claims.

Having said that, you should remain vigilant and uphold high standards of advice, compliance and risk management. While premiums may be lower now, the industry is still highly regulated, and insurers will likely adjust pricing if risks increase again in the future.