Smaller IFAs may be able to obtain cheaper PI cover in the future if firms with turnover of £10m or ...
Smaller IFAs may be able to obtain cheaper PI cover in the future if firms with turnover of £10m or more are not required to have PI cover, according to the FSA's proposals for changes to the PI market.
Ideas laid out in CP169 - Professional Indemnity Insurance for personal investment firms - for the long-term reform of PII suggest the market would be able to offer better insurance rates to smaller IFA firms if those with turnover of £10m or more pay for any liabilities from their assets, rather than take out PI insurance.
This would be a huge reduction of the market capitalization requirements previously adopted by the FSA, which only allowed companies with £50m or more in capital to cover liabilities through their own assets rather than PI.
The FSA is also looking at basing most PI requirements on the turnover of these firms, rather than their total market capitalisation as well, as reviewing what the regulatory body would see as suitable assets for "capital substitute for PII".
Key to potential reform is flexibility to allow IFAs to decide which option they would prefer to take, says CP169.
Rather than keep the minimum capital adequacy requirement at £10,000, IFAs could increase their minimum levels of free capital and increase the excess on their PI cover so the premium payments, suggests the FSA, and vice versa.
"Findings suggest that any future policy on PII for investment firms could be made more flexible, with firms having some degree of freedom to choose between the amount of capital and PII cover that they hold," says the FSA in CP169.
"So a firm with more capital could be permitted to have a higher policy excess than a firm with lower capital…meanwhile it would benefit well-run firms, who, if they obtain cover with a lower policy excess, might be able to reduce the amount of capital they hold."
Most of the ideas for discussion and alternatives to current PI rules can be found in Chapter 6, which is laid out in two parts: consultation on whether the plans announced in November allowing IFAs to self-certify their PI status should go ahead in the short-term, as well new ideas on the direction of the long-term PI market.
The FSA argues it would not be in the interests of either the IFA market or consumers to do away with PI insurance at this stage as it could lead to smaller IFAs going to the wall and leave the Financial Services Compensation Scheme (FSCS) footing the bill.
Similarly, the FSA looks at whether an mutual insurer would be interested in setting up a central pot to provide PI cover, similar to that used by the Solicitors Indemnity Fund.
However, concerns about the idea of a central PI pot have been raised in the past by trade body officials who point out that the Solicitors PI fund eventually had to be rescued as it developed a £100m deficit.
John Ellis, spokesman for the Life Insurance Association says:
"There are very few people who want to underwrite these contracts now and it would be good to think there was a way of contributing to a fund to keep everyone afloat," says Ellis.
"But do we really have the will to do that? It is a question of whether people are prepared to finance Joe Bloggs down the road, who doesn't run his own business too well," he continues.
"We have got to balance whether we are prepared to see 30% of the IFA market go to the wall or incur the risks of something which could be financially disastrous at a later date and I suspect it will be we lose 30% of the IFA market," adds Ellis.
It could still be the case that any proposals the FSA puts on the table might have to be reformed again as the European Commission has yet to decide what it thinks PI requirements should be.
One of the biggest problems the FSA faces with any ideas for the PI market is European legislation, as FSA regulations usually have to meet any EU legislative.
Professional Indemnity insurance is already required by intermediaries under the Insurance Mediation Directive, however the Investment Services Directive may yet require, for example, that investment advisers increase their minimum capital adequacy requirements or carry different excess levels on their PI policies to those regulations set out by the FSA. This in effect means the FSA might have to rewrite their plans for PI cover again once EU regulations are introduced.
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