forthcoming Eu directive means all IFA firms will have to have cover in place
The FSA has scrapped proposals to allow intermediaries with turnover of £10m or more to go without professional indemnity insurance (PII).
In its latest consultation paper, CP193, released last week, the FSA said exemptions based on turnover or capital resources, as proposed in the earlier CP169, would be in breach of the EU's Insurance Mediation Directive (IMD), with which FSA regulations must be in accord when it comes into law in January 2005.
The IMD requires insurance and reinsurance intermediaries, which the FSA said includes the majority of personal investment firms, to have PII.
The directive sets a minimum limit of cover, or indemnity, of E1m for an individual claim and an aggregate claims limit of E1.5m.
However, the regulator said even firms not covered by the IMD will be covered by the new FSA rules on PII.
Firms not covered by the IMD will be required to hold single claim and aggregate cover of at least £500,000 if their relevant income is less than £3m, and single claim cover of £650,000 and aggregate cover of £1m if their income is £3m-£6m. Non-IMD firms with higher income must hold even more cover on a sliding scale.
However, the FSA said it will allow firms to use financial resources to offset policy excess and cover potential liabilities arising from policy exclusions. The firms must have reserves sufficient to cover any excess above £5,000 that can be accessed within 90 days. This will encourage underwriters to provide PI cover as they will be able to decide how much risk to take on, the regulator stated in CP193.
The FSA has also abandoned proposals for a two-tier PII market that would allow firms to choose between obtaining the minimum PII cover in line with EU directives or enhanced cover in line with FSA policy. It said it believes the lower tier would result in a deterioration in the quality of cover and create difficulties regarding disclosure to consumers.
PII will need to cover a firm's regulated and unregulated activities and any claim arising from the activities of the firm, its employees or anyone acting on its behalf.
The only firms that will be exempt from the PII requirement will be those that hold a 'comparable guarantee' from another entity. The exemption will only be available to firms that are members of the same group such as a bank, building society or insurer.
This is to ensure the guarantees are only provided by entities where the liability will be taken into account in the regulatory capital requirements.
Group PII policies will be allowed as a means of cutting administration costs by putting several firms together under one policy. However, each firm included in the policy will be responsible for informing the FSA if total claims exceed the minimum aggregate level of cover and ensuring all companies within the policy continue to be adequately insured.
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