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Waivering over PI

The FSA’s waivers for professional indemnity insurance, introduced two years ago, have come to an end with the onset of the insurance mediation directive last Friday.

The IMD, which requires intermediaries to have 1m in PI cover, and its harsher cousin, the market in financial instruments directive, which comes in next year, are changing the face of PI for IFAs.

IFAs have been enjoying a more relaxed attitude from the regulator since January 2003, when it introduced the possibility of waivers by granting one to the Falcon Group.

Using the firm’s quarterly reports, the FSA established its turnover as 10m, with capital resources at 939,000, and judged that it had the resources to meet potential liabilities.

But the IMD’s stringent requirements mean that waivers for PI are no longer an option and the Mifid is stricter yet, requiring companies to have 500,000 extra cover, set aside 30,000 capital or have a combination of the two in place.

Aifa director general Fay Goddard believes there could have been as many as 300 IFA firms with PI waivers at some point.

The Falcon Group found compliant PI cover with Magian Mutual from December 2004 but other firms have not yet got cover.

Alan Harris, a director of Harris Investment Management, which holds a waiver, is trying to sort out PI cover and is using Collegiate to act on the firm’s behalf.

But Harris says: “Contrary to the information coming out of the FSA, in fact for sole traders there are only three underwriters – Canopius, Magian Mutual and Chubb. These are the only firms which are in the market for IFAs with a turnover under 500,000.”

Collegiate marketing and project development director Fergus Chappel says the market has become softer for PI and there is more choice for bigger firms but not for sole traders and smaller IFAs. He believes the PI market is still patchy and insurers are very selective about which firms they take on.

Harris says if he does get cover he will probably be held to ransom over the terms, with a minimum premium of 5,000, “an exceptionally high percentage of my turnover”. He also predicts that the excess is likely to be 15,000 to 25,000, which excludes virtually any realistic claim.

He says: “An endowment claim is typically 15,000, which means that the coveis useless. I will be paying money to insurers so I can stay in business under the EU rules but I will not be getting anything out of it.”

Harris was told by the FSA to try as many brokers as he can to ensure his case is seen by as many underwriters as possible but he is adamant that this is a counter-productive approach.

He does not think the FSA understands the reality of the PI market and he has written to the regulator to point out its suggestion would mean the same underwriters seeing the same application several times over.

He says it would be unfair and in many cases unacceptable to the brokers to operate in this way.

Harris’s situation is precarious. He describes it as “business-threatening” but he is doing all he can, including trying to develop a group policy with six to 12 small firms grouping together to get round the requirements of the directive.

Money Marketing understands that one firm with a high-profile director which was granted a waiver has failed to find PI cover to meet the IMD but is planning to wait and see what happens.

MM understands that the director got a quote for a premium of 20,000 with an excess of 200,000 per claim.

Chappel says: “I would hope that the majority of people with waivers have sorted out cover but I fear that there may still be some in difficult situations.”

It remains to be seen what action the FSA will take over these firms.

In another letter to Harris, the regulator said: “Where a firm does not follow one of the options in the letter within 28 days of the renewal date of its policy, including failing to let us know its situation in relation to PII, we may refer it to enforcement to stop it from conducting regulated activities by cancelling the firm’s part IV permission.”

But FSA chief executive John Tiner said in July that, consistent with its EU obligations, the FSA intends to exercise supervisory discretion with regard to PI requirements when a firm holds sufficient financial resources overall.

The FSA has made clear that its overriding objective is not to put firms in a position where they have to close down or merge to meet a requirement which might never have an impact on their business.

Personal Finance Society public affairs director John Ellis says: “My impression is that the FSA wants to get the PI system working properly and so they will not be moving in too quickly to enforce the IMD.”

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