UK's Financial Services Authority To Decide On The Future Of Professional Indemnity Insurance

The FSA has today published a consultation paper CP169: Professional Indemnity Insurance for personal investment firms- aimed at formalising the short-term modification made to its rules in November 2002. The modification was made in response to difficulties being experienced by some IFAs in obtaining compliant cover and was designed to increase availability in the PII market for this sector. In determining what changes could be made to policy requirements, the FSA has sought to reflect so far as it could the views of market participants, but has made only changes that do not pose additional risks to consumers.

The paper also contains other policy proposals for the future of professional indemnity insurance for the investment industry.

David Kenmir, Director of Investment Firms Division, said: "The PII market is currently tighter than it has been in the past. This is attributable to a number of factors, not least the general economic conditions which have had a major impact on the insurance sector. The changes we are proposing are intended to increase the capacity in the market by encouraging underwriters to write more business."

"This paper also introduces other policy options such as introducing a trade off between PII and capital; making our PII requirements less prescriptive and the possible introduction of a mutual insurer for IFAs. Some of these options are constrained by requirements in EU Directives."

"We are aware of the consumer protection implications of firms' inability to obtain PII cover. This is one of the key drivers in the approach we are taking to those IFAs without cover. We explain our approach to our work with IFAs in this paper but the bottom line is that if firms do not have adequate resources overall we will take action against them".

"Concerns about the growth in demand for compensation for allegedly poor advice have also contributed to the current situation. Some IFAs and insurers are concerned about the potential for further past business reviews, like the pensions review. In this paper we explain the important safeguards built into the legislation in relation to such reviews. We also reiterate our commitment to define "mis-selling", as Ron Sandler recommended in his report."

The FSA has found that 76% of IFAs (whose PII expired between 1 September and 30 November 2002) have successfully obtained cover. An analysis of the information provided by IFAs in this period shows that 88% of IFAs due to renew their cover in September have done so. The figure for October is 85% and November 66%. This does not necessarily mean that the other IFAs have not got cover. The FSA knows that IFAs are reluctant to confirm that they have cover until they have received a cover note even though they may have agreed terms with their broker. This means that there is usually a gap between the expiry of an IFA's PII policy and the receipt of confirmation that the policy has been renewed by the FSA. The FSA gets confirmations from IFAs each day and so the "compliance rate" improves over time. All IFAs without cover are contacted by the FSA so that it can discuss their position.

Background

1. Responses to the CP/DP - Professional Indemnity Insurance for personal investment firmsneed to be received by the 17 April 2003.
2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.
3. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.