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FSA ditches risk scheme for PI

The FSA has dropped its suggestion that advisers could face risk-based assessments to decide how much professional indemnity cover they should hold, with a flat rate now looking the likeliest option.

As part of a review of prudential rules, published alongside the RDR, the FSA commissioned Frontier Economics to look into risk-based assessments. Along with many respondents to the report, the consultancy concluded that it would not be reasonable for risk assessments to take place.

A flat rate was the most popular suggestion with respondents. Given suggested rates of £20,000, £35,000 and £50,000, most small adviser firms said they could meet the higher requirements.

Frontier Economics also reported that it believes the current PI market is working effectively and efficiently.

The FSA is still considering how firms will retain capital adequacy levels once they cease trading but says that bonding arrangements are not the answer.

Last June’s discussion paper proposed PI run-off cover, segregated trusts and bonding requirements as possible solutions. Run-off cover was popular with respondents but the regulator says it could only be an option if it were commercially viable for insurers to provide it.

Simply Biz chairman Ken Davy says: “It is encouraging to see the FSA recognise that there is no evidence of any consumer detriment linked to capital adequacy requirements.”

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