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PII exclusions will push up capital requirements

Firms with business lines excluded under their professional indemnity insurance policy will now have to hold a minimum level of additional capital resources, according to the FSA.

Current rules do not specify the amount of additional capital that needs to be held.

But the regulator’s review of the prudential rules for personal investment firms found that minimum capital limits are necessary to ensure firms are covered in the event of a liability.

The regulator estimates that 2 per cent of firms will need to hold additional capital resources to cover their PII exclusions under the proposals. It says this will require total additional capital of £1.6m during benign periods. with firms having to hold additional capital resources of at least £67,000.

However, it says when PI is harder to obtain these requirements will impose higher costs. It says then additional costs to advisers at 5 per cent PII exclusion rate would be around £4m and at 20 per cent £15.9m, working out at £168,000 and £668,000 each respectively.



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