We have rarely seen the advice community as incensed as by the recent FCA-mandated decision to increase the Financial Ombudsman Service (FOS) maximum award from £150,000 to £350,000, to embrace the larger size of awards arising from transfers from Defined Benefit pension schemes. Since the risk falls largely if not entirely on PI underwriters, this is likely to kill the transfer market stone dead. Either the adviser will not pay or the clients will not pay the adviser what it needs to meet its PI cover. Many believe this is in fact the FCA’s intended outcome.
DB transfer awards are viewed as a special case because of the unusual size of the liability relative to claimants’ income and free capital, so there is a barrier to going to court. This is hard to argue with. It’s why we have ombudsman services.
But a case in equity can be made for the adviser to be entitled to rely on the courts, not an ombudsman, when it comes to high-value transfers, not just because of the potential size of liabilities but because comparative advantage in recent years has been so finely-balanced, based on the maths. FOS may be able to handle consistently cases of egregious fault or outright fraud but there is real doubt about its competence to test comparative economic advantage where it is more finely balanced. It was after all because of the complex maths that this was once exclusively a task for actuarial consultants – although we would argue that even actuaries are unlikely to employ the stochastic or simulation-based modelling of outcomes necessary to judge comparative advantage between a risk-free real income and a partly risky income. This of course is bread and butter to Fowler Drew. In the absence of rigorous quantitative tools, both the FCA and FOS are inclined to fall back on prejudice borne of protective instincts.
Society broadly accepts that there will be some rough justice as a result of the short cuts involved in any ombudsman process – but only if there is a fairly low size limit. A principle has now been breached, and breached without consultation or warning.
One solution might be for the adviser to have the right to opt to go to court but on the basis that it meets the claimant’s costs even in the event of an unsuccessful claim. We’re not legal experts so we’re far from sure this is feasible.
This would not necessarily prevent PI costs rising but that is because of the liability size, not the source of the award.
This new development should make it absolutely clear why the most appropriate, if not the only rational, way of charging is to make the advice fee size-related and contingent on going ahead with the transfer. Objectors to contingent fees are, on this occasion, missing the point. PI cover and self-insurance using ‘own funds’ are economically equivalent; both are sourced from profit; they should not permit cross subsidy between different clients of the firm.
Until this is sorted out, we will stop carrying out any transfers from final-salary schemes, even though our capital is (in our judgement) adequate to cover liabilities that might arise from awards arising from court action. For our existing clients, this is immaterial: all those whose welfare was increased by transfer, even if not in the past, have made the change and their retirement plans adjusted to reflect the substitution of the DB underpinning by a combination of risky and risk free assets. We plan to keep our transfer calculator available online, as an educational tool.