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Smee&#39s warning on PI for loan and general brokers

The FSA&#39s extension of mandatory professional indemnity insurance to up to 35,000 general insurance and mortgage intermediaries could stifle an already constricted PI market, Aifa has warned.

Director general Paul Smee says he has serious concerns about the proposal outlined in CP174, published last week, to force advisers to have compulsory PI insurance once they become regulated by the FSA in late 2004 or early 2005.

IFAs wanting to give mortgage or general insurance advice will not have to extend their cover but Smee warns they will still be affected because the overall size of the market will be reduced.

He says there are questions to be answered about the capacity of the PI market to absorb between 10,000 and 35,000 firms that may seek authorisation under the new regime.

Members of both the MCCB and GISC are required to have PI cover but, with a combined membership of about 19,000, they will not make up the total number applying for authorisation.

The FSA says mortgage brokers should have adequate cover but general insurance firms may have to increase cover. It proposes PI cover of the higher of £680,000 or three times annual income for general insurance firms and £500,000 for mortgage advisers.

Smee says: “We need more analysis of the practicalities of the PI market delivering this cover at reasonable prices and reasonable rates. When it becomes a statutory regulatory requirement, how will the PI market react? Will it say this is the FSA, the FSA reviews things, we will have to hike our rates?”

FSA spokeswoman Kate Bristowe says: “We are acutely aware of the difficulties experienced by investment firms. In the CP, we have specifically asked firms whether the market is sufficient to meet their needs.”

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