Professional indemnity requirements for advisers

Professional indemnity insurance must be held from the date the business becomes FCA authorised.

Unlike other professions, such as solicitors and surveyors, the FCA does not enforce a standard wording for financial advisers, more commonly known as minimum terms, and as a result there are varying levels of coverage offered by the professional indemnity market.

There are however more general rules governing professional indemnity for financial advisers including rules relating to the limit of indemnity and excess levels.

The FCA requires that all firms must carry a specified minimum level of indemnity for both a single claim and aggregate claims per year.

For firms that fall under the Insurance Mediation Directive, the minimum levels are set out in euros and according to Umesh Puri, associate director of the professional indemnity division of Howden Insurance Brokers, at the time this guide was produced are:

• €1.12m (or £806,199) for each and every claim, and

• €1.68m (or £1.21m) for claims in the aggregate.

For UK-based firms, Mr Puri says these minimum requirements can be converted into sterling.

The minimum limit of indemnity referred to above is based upon a firm’s “relevant income”.

Mr Puri says firms with relevant income in excess of £6m will, in the majority of cases, be subject to higher minimum limits of indemnity.

FCA regulation allows financial advisers to carry an excess at any level they like, although Mr Puri says the minimum excess levels are often dictated by the professional indemnity market itself.

That said, he says where an excess exceeds £5,000 for a particular product or across the board it will attract the need to hold “additional own funds”.

For those firms that “passport” their services and have to meet the professional indemnity requirements of the Markets in Financial Instruments Directive, Mr Puri points out there are further requirements regarding the limit of indemnity or capital adequacy.

The FCA’s passporting fact sheet (http://www.fca.org.uk/your-fca/documents/factsheets/fs-025-passporting) states for an ‘exempt capital adequacy directive firm’, which is not subject to the Insurance Mediation Directive, the FCA states this will mean holding initial capital of €50,000 (£35,988) or professional indemnity insurance with a minimum level of indemnity no lower than €1m (£719,889) for any claim and €1.5m (£1.08m) in aggregate.

A firm can opt for an initial capital/PII trade off providing the combination gives a coverage equivalent to either of the requirements separately, the FCA states.

For an ‘exempt CAD firm’ which is subject to the IMD, the FCA states broadly it must meet at least the IMD’s PII requirement and have additional resources in one of the following forms:

• initial capital of €25,000 (£18,003);

• professional indemnity insurance of €500,000 (£360,076) for any one claim and €750,000 (£540,156) in aggregate;

• a combination of initial capital and PII resulting in an equivalent level of coverage to the options above.

Under all the options above, the FCA states a firm must have initial capital of at least £10,000 and must also meet an ongoing own funds requirement which is equal to the requirement for initial capital.

According to the FCA the level of PII may need to be higher, depending upon the firm’s relevant income and firms should check with their PII providers that they are covered to provide cross-border investment services.