In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for financial professionals.
Key developments in 2021
Once again, our key development this year concerns defined benefit pension transfers. During 2021 the FCA published further finalised guidance (FG21/3) which stressed what it expects of advice firms. It also updated its redress methodology (FG17/9) with one change being that advisor charges now have to be factored in to calculations, increasing redress costs further. This year has also seen the FCA press for customers of firms in liquidation to be written to, alerting them to potentially unsuitable advice. On top of this, there has been a raft of requests to firms pressing for full past business reviews. This follows the FCA's publication of further market data in January (covering October 2018 – March 2020) noting a decrease in conversion rates and a fall in the number of active advice firms.
The question is: where does the FCA go next? British Steel remains a concern; the FCA has contacted former members twice by post and hosted clinics extolling the virtues of bringing a complaint. Nikhil Rathi of the FCA wrote to MPs in July stating that he was looking at an industry wide review under s.404 of FSMA (something we haven't seen since the Arch Cru review). The FCA then cooled on this idea, stating that they needed additional information before making a decision, but in the Autumn the National Audit Office announced that it was conducting a probe into the FCA's handling of poor pension transfer advice, with a focus on British Steel. The involvement of the NAO could mean that s.404 is very much back on the table.
What to look out for in 2022
2022 might see a more aggressive approach from the FSCS in looking to recover compensation. Whilst the levy for 2021 / 2022 was lower than expected, this comes as a result of anticipated failures having simply been postponed, as the FSCS' first forecast for 2022/2023 is £900 million, £400 million of which relates to failures that are yet to occur. As touched on above the FCA is insisting that liquidators of pension transfer advice firms write to customers who may have received inappropriate advice, which will further increase the likelihood of claims to the lifeboat fund. This approach follows the publication of FG21/4, which provides that an insolvency practitioner is to write to entire populations of customers "who may have a claim for redress against the firm." Interestingly, this comes at the same time as the FCA is consulting on whether to remove financial losses suffered following the failure of advice firms from the FSCS' remit. This could mean a lower levy for firms in the future, leaving more cash available for businesses to pay excesses / PI premiums.
In the short term, the FSCS is under is statutory duty to pursue recoveries and the Third Parties (Rights Against Insurers) Act) 2010 has simplified the process for bringing a claim against insurers if an insured has entered insolvency. The ultimate result is that large scale insolvencies are unlikely to mean insurers are able to close their books and the risks of the past few years (including SIPPs, NMPIs and pension transfers) may rear their head again in the future in the form of FSCS claims against insurers using assigned rights.
Written by David Allinson.
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