Be clear on these tricky areas to shield your firm from risks
Advice firms are expected to maintain appropriate professional indemnity insurance cover at all times. Unfortunately, we often come across issues with firms’ arrangements. Here is a summary of the most common pitfalls:
If the excess on your policy is greater than the standard limits stipulated by the FCA, then additional own funds must be retained. The level of additional own funds must be based on the highest excess required to be paid under your policy for the type of business your firm has carried out in the past. These funds must be readily realisable within 90 days.
The FCA provides a table in its handbook to help calculate the additional amount you are required to hold. If you are required to hold additional capital due to an increased excess, the additional amount will need to be recorded in section D1 of your Retail Mediation Activities Return. This will be recorded in either question 7 or 13, depending on the type of business the increased excess applies to.
If your policy contains exclusions for business your firm has carried out in the past or may carry out during the policy term, you must set aside additional capital resources.
These will be in addition to your firm’s standard capital requirements and any additional requirements due to increased excesses on the PI insurance, as covered above. Again, the FCA’s table in its handbook will help calculate the minimum additional amount you are required to hold. Remember, when using the table to calculate the minimum additional amount, you will need to use the firm’s total income and not just the income from the business excluded under your policy.
This formal requirement only applies to investment firms and not firms that only transact mortgage and/or non-investment insurance business. You will need to record this figure in section D1 of your RMAR, but only under question 13.
Policy terms in excess of 12 months
We occasionally come across firms with policies in excess of 12 months, with 18 months being a common example. When the cover is spread over the extended term and not annualised, it can result in it not being compliant. The aggregate indemnity limits apply per policy year. So, for a policy with a term in excess of 12 months, the aggregate indemnity limit will need to be increased proportionately.
When reviewing PI policies, it is not always clear whether cover is spread over the term or annualised. If your policy runs for more than 12 months, you should check it is compliant
Conducting business as agent of the client
A firm that uses a discretionary fund manager’s model portfolio service and acts as agent of the client has recently mentioned that it could invalidate their PI insurance unless their provider was informed.
Although we have not seen this specific issue before, a firm acting as agent in its dealings with a DFM is something that should be disclosed to the insurer. Failure to do so could give the PI insurer the opportunity to claim there was not proper disclosure within the proposal.
Bear in mind that insurers may now be picking up on the fact some firms do not really understand the relative responsibilities of the parties in the arrangement: that is, who is responsible for suitability of the service.
Ian Grundy is head of business risk at Threesixty
Advice firms should review their PI policy schedule and documents at inception and at each renewal to ensure they are compliant. Key points to check include:
- If the policy is written on a claims-made basis, does it provide retrospective cover, all the way back to your firm’s authorisation date?
- Do the limits of indemnity meet the current minimum limits, both for a single claim and in aggregate?
- If the limits of indemnity are quoted in sterling, do these limits meet the minimum euro limits, especially in light of any changes in the exchange rate?
- Do any policy excesses exceed that permitted by the FCA?
- Does it provide explicit provision for Financial Ombudsman Service awards made against your firm? Is the level of cover sufficient?
- Does it provide cover for claims arising from the conduct of your firm and your employees?
- If you have appointed representatives, does it include explicit provisions for claims in relation to their conduct?
- Does it provide appropriate cover in respect of legal defence costs?
- Does it contain any exclusions that appear to have been inaccurately drafted, or effectively mean that the policy being provided does not fully cover all of your firm’s activities?
- Does it contain any out-of-date references to regulatory bodies, for example, references to the FSA?
- Does the policy contain other inaccuracies, errors or exclusions that create any gaps or omissions in the cover required?
If you identify any issues, contact your PI insurer as soon as possible to discuss what actions need to be taken.