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PII exclusions will force firms to hold more cash

Firms that cannot get insurance for certain lines of business or for thematic reviews instigated by the FSA will be forced to hold significantly more capital.

The new prudential rules for personal investment firms require that where a firm has exclusions on its professional indemnity insurance it will be forced to hold additional capital above the minimum £20,000 or three months’ expenditure.

The additional capital will be calculated based on firm’s income, rather than how many exclusions they have on their PII policy.

PYV chief executive Neil Pointon says some underwriters refuse to provide cover for some lines of business, such as pension transfers or structured products. Some also exclude thematic reviews instigated by the FSA.

He says: “Over time we have seen more of these exclusions appear. The action the FSA is taking by highlighting exclusions may deter underwriters from sneaking them into policies. It may also show IFAs that they need to shop around to make sure they have sufficient cover.

“I would recommend all IFAs try to get a PII policy without exclusions, rather than holding additional capital.”

Pointon says underwriters are likely to back away from insuring structured product business in light of the recent FSA review.

He says: “The FSA’s action is yet to take effect for IFAs renewing their policies but underwriters are going to be looking at structured products very closely from now on.”

The FSA says it cannot yet clarify whether the rules will apply retrospectively.

FSA head of accounting and auditing of the prudential policy division Richard Thorpe says: “We would have to look at specific policies when the issue arises.”

Aifa director Robert Sinclair says: “Hopefully the FSA will be pragmatic in this area. We would be very interested to hear what the regulator’s thinking is.”


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. If your talking new business, then high excesses or an exclusion are a busienss decision. If your talking exclusion or excesses on existing business, this is a serious issue and one that needs careful consideration. Is it wise to allow an IFA firm to fold and then have to phoneix (or the advisers to move to a new firm), when the issue is an inability to get PI cover for work already done? WE saw this with firms when moving from PIA to FSA being unable to get renewal terms and ceasing to trade. Liability passed to the FSCS (i.e. those firms that survived), whilst many advisers then went on to otehr firms or even set up knew ones. The FSA have had nearly a decade to think about what to do if this started happening again?
    Where is the plan?

  2. “thematic reviews” ~ now there’s a nice euphemism. Pretty soon, PI insurers will slam their doors in the face of the IFA sector, and who can blame them? How can any insurer make a profit out of an unquantifiable and ever shifting risk? They don’t know what risk they’re trying to underwrite.

    Alternatively, they might simply exclude any claims arising from hindsight reviews instigated by the FSA, which isn’t that far removed from what happened when the PIA directed firms to write to all clients effectively informing them categorically that they’d been given defective advice on the pensions front and that they should accordingly raise a formal complaint.

    Will things ever improve and will the FSA ever be held to account for its own manifest and perennial failings? We live in hope if not expectation.

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