Professional Indemnity Insurance

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Unfortunately we can’t answer that. We are not in a position to find cover for specific firms. Also, the availability of cover very much depends on the individual characteristics of your firm. However, when looking for a broker you should find out what service they provide and how many underwriters they deal with. More information is available on the Professional Indemnity Insurance page.

We do not prevent firms from dealing direct with insurers/underwriters. We are aware that some firms have approached insurers/underwriters directly and have been successful in obtaining cover. This is really a matter for you to decide, but you should be aware you cannot contact Lloyd’s syndicates direct. Some other insurers/underwriters will not speak to IFAs direct. In such circumstances, you will have to go through a broker.

PII provides firms with a source of additional funds from which it can meet justified claims. By insuring against the risk of claims a firm is less likely to fail to meet their liabilities.

There are risks relating to inaccurate promotion and poor execution, as well as staff giving advice when they shouldn't. Firms doing execution-only business may still be liable for claims as a result of errors and omissions. When securing cover, your broker might be able to present a case to the insurer that as there is less risk attached to the type of business you are writing, the premium should be lower.

Claims on a firm relating to non-regulated business can reduce the capital strength of a firm, and thus its ability to meet claims arising from its regulated business. This is why we require PII to cover all business. If you believe that your non-regulated business carries less risk, then you should discuss the matter with your broker. If there is less risk, it should follow that this is reflected in a lower premium. 

Yes, these include:

• joining a network; or
• merging with a firm that has PII;

If you take either of the first two steps then we would expect you to have measures in place for any claims made by customers relating to the former business.

If you are unable to identify any appropriate alternative, you could stop conducting regulated activities and apply to have your permission cancelled.

All applications for authorisation are considered on their individual merits. It is not the case that failing to obtain PII cover for a previous firm would automatically mean that an application for a new firm would be unsuccessful. However, if proper arrangements are not made for dealing with claims relating to the previous business, this may have a bearing on the application.

If you are a sole trader or a partner, the liabilities remain yours. If your firm is a limited company then all liabilities remain with the firm. However, it is likely that you will be required to sign a form on behalf of the applicant firm, accepting the liabilities of the previous firm during the authorisation process. These liabilities are unlikely to be covered by any PII policy you then obtain.

No we can’t – that is a commercial matter. But we are in contact with insurers/underwriters on a regular basis to try and improve the situation.

It has been suggested that we should set up a mutual insurer for IFAs, either in place of – or in addition to – the existing commercial PI insurers.

As a regulator, we cannot get involved in commercial insurance activities, but we are more than willing to work with the IFA sector and insurance industry if there is sufficient support for this idea. We discussed the possibility of a mutual in more detail in Consultation Paper 169, but it did not receive widespread support from respondents.

The rules allow flexibility for your firm to have an excess greater than £5,000, so long as your firm holds extra capital. This recognises that your firm is retaining risk and will need to pay justified claims within the excess.

You should use the table in IPRU(INV) 13.1.4(12) E to calculate the minimum amount of capital you have to hold in a ‘readily realisable’ form. On the left-hand side you will find your firm’s relevant income and you need to use the top row of the table to find your excess level. You should then join the points of these to find the minimum amount of additional capital required.

The rules require firms that have exclusions on their policy to hold additional ‘readily realisable’ own funds so that if claims are made, funds are in place to meet any justified claims.

It is up to firms' senior management to decide how much money or other assets they should hold to cover a particular exclusion. They should consider the amount of business written of a particular line, the risk of a complaint (e.g. with splits this could be higher than with another product), or the number of complaints received. You should keep a record of what you decide to do and why.

If your firm has never carried out a particular type of excluded business and does not intend doing so in the future, then you do not need to hold additional funds, as there is no risk attached to having the exclusion.

Property cannot be counted, as it is not considered ‘readily realisable’ within 90 days. There is no guarantee that the money involved will be realised in this time period.

Directors or individuals within a limited company cannot use personal assets. Assets for limited companies must be within the firm. A sole trader can use personal investments, but a partnership cannot, as partnerships have an estate separate from partners (see Partnership Act 1890).

For an in-depth description of capital requirements for firms see IPRU(INV) Chapter 13 and Table 13A.

If you are in any doubt about the assets you intend to include, then you should get in touch with your usual supervisory contact.

‘Readily realisable’ assets are those that can be realised within 90 days. For example cash in the bank, insurance policies etc. This will not include property, as there is no guarantee that funds from a sale of property can be realised within 90 days.

The money would need to be held in addition to a firm’s normal capital requirements under Chapter 13 of IPRU(INV).

If your firm is category B, then the ‘own funds’ requirement is £10,000. Please see 13.10 of IPRU(INV). If your firm is in a different category, there are additional financial resource requirements that you are obliged to meet. Please see 13.2 of IPRU(INV).

Basically the amount of ‘own funds’ held will be certain assets minus some exclusions/liabilities. There are examples of how to calculate this in the relevant IPRU chapters. Please see IPRU(INV) 13.3 or 13.10.

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‘Relevant income’ for PII purposes is gross income paid or payable to the firm, which is commission, brokerage, fees or other relevant income arising from professional business activities (authorised or not) covered under the PII policy. This applies for the last accounting year before the start or renewal of the policy, or as per the business plan for new applicants.

The rules are minimum standards and it is up to a firm to consider whether it needs cover above this level. So a firm may negotiate to the minimum standard if it feels it can.

We expect the limits to be sufficient at the time you agree the policy terms with the underwriter. If you are concerned that this might not be sufficient because of a large fluctuation in the exchange rate, then you should seek a policy with a suitable margin to allow for these fluctuations. It is up to the firm's management to ensure that the PII cover remains adequate.

Yes. We expect management entering into such arrangements to remember that the requirements in IPRU(INV) 13.1.4(15)R are minimum obligations, and higher levels of cover might be appropriate. In addition, management may also wish to put measures in place to monitor the level of notifications and claims being made by all the firms covered by the policy.

Yes. This is a notification requirement listed in 13.1.9R of IPRU(INV).

The IMD sets out minimum levels of cover that a firm should hold to help ensure that cover is available to meet the costs of claims. The amount of cover a firm holds should not be eroded by legal defence costs or any other incidental costs. Once management have decided that additional cover is needed, then you can either increase the amount of aggregate cover or take out an additional policy for these costs.

Yes. This is what we would expect to see in an IFA's policy. While you should discuss the wording with your broker, you must remember that the adequacy of the policy is ultimately the responsibility of your management.