This action has been taken following a review of the PII market which was prompted by concerns expressed by some IFAs that they were finding it increasingly difficult to obtain compliant cover. The FSA expects this decision will help IFAs do so.
The modification will be available from 1 November 2002 and will run for a period of nine months. It will apply for the duration, usually one year, of PII contracts entered into during that period. The FSA will continue to monitor the PII market. If it is judged that the modification has had a positive effect the FSA will consider making a formal rule change.
David Kenmir, Director of Investment Firms Division, said: "Our review found that premiums have increased on average by 50% this year but this is not out of line with increases in other comparable insurance markets. Whilst it is true that over a five year period IFAs premiums have, as a percentage of turnover, increased from 1.4% to 3.5% other professionals still pay higher premiums for their PII.
"FSA regulates over 4000 IFAs, between January to mid-September 2001 only 124 IFA firms were referred for regulatory action relating to non-compliant PII. Out of these 124 firms, all but 7 had other regulatory problems. This suggests to us that underwriters are assessing the risks attached to individual IFA firms when deciding whether to underwrite cover or not. This also appears to be backed up by data which shows that IFAs with a poor claims history pay higher premiums than IFAs with no recent claims history.
"However, there are signs that the PII market is becoming harder, and 1200 IFAs are due to renew their mandatory cover in November which may put stresses on the market in the short term. Granting this modification is a good regulatory solution. The underwriters have indicated that these changes will encourage them to write more business which in turn will increase the availability of PII cover for IFAs.
"We want to make this process as easy as possible for IFAs. Firms can confirm their compliance with the amended requirements by sending a new self-certification form to the FSA indicating their consent to the modification. The form and further guidance are available on our website at http://www.fsa.gov.uk/waivers/waiver_consent.html or by telephoning the Investment Firms Division Contact Centre on 0845 606 9966.
"We must ensure that consumers are afforded adequate protection but at the same time need to ensure that FSA's requirements do not distort the market. In the course of our survey we have received some very useful feedback from IFAs, PII brokers and underwriters. This will help the FSA develop its long-term PII policy. We would welcome further comments on our future policy from interested parties."
