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Regulatory fines are based on your bank balance

I would like to refer to the editorial in the August 7 issue of Money Marketing regarding, PI questions that need answering.

There is quite a severe backlash to the comments that small IFAs should go for professional indemnity opt-outs, provided they have the capital to meet potential claims -if you have a lot of money in the bank, then we can be free of the PI requirements.

No, this is not necessarily true because in terms of what one has to pay out.

Let us look at misdemeanours on breaking the FSA rulebook. We go through the disciplinary procedures but the criteria to fine an IFA does not appear to be based upon the risk to a client or whether the client has lost money but based upon the firm&#39s ability to pay the level of fine imposed.

To this end, the regulator will look very closely at your accounts and the bank balance at the end of your accounting period and then make a decision on the amount of the fine.

Is this fair? I do not believe it is as the fine should bear some relationship to the rules broken and the levels of risk to the client.

You do not have to take my work on the way the regulator assesses the fines imposed. I enclose a letter dated March 6, 2001 from the PIA on how they assessed ourselves. When I phoned the regulator, he said: “The level of fine imposed is because we have checked your accounts and you can afford it.”

By coincidence, the amount of the fine was 20 per cent of the bank balance held in our accounts at the end of the accounting period – not in 1998 when the event occurred but in 200 when we had a good year.

I have heard of other IFAs being fined and when they related this back to their bank balance, hey presto, a 20 per cent fine.

The point I make is that if IFAs build up their bank balance to fund their own professional indemnity cover to a level where they feel comfortable, will the regulator them impose a fine of, say,20 per cent of this capital accumulated for any misdemeanour in breaking of the rules, irrespective of the level of risks to clients?

As you will appreciate, it is and will continue to be difficult to adhere to every rule in the book for advisers. I hope this gives you another perspective in going it alone for an alternative to PI cover.

Extract of letter from the PIA dated March 6, 2001:

With regard to your firm&#39s ability to pay the proposed level of fine/costs, the committee is not prepared to accept the arguments put forward. based on the financial information at its disposal, it would appear that your firm is able to meet the specified amounts without undue difficulty.

Alex Houghton

Managing director,

Houghton & Associates,

Harrogate, North Yorkshire


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