FSA announces controversial new rules requiring £700,000 cover per claim
Changes to professional indemnity (PI) cover and the appointed representatives (AR) regime have emerged as the most controversial elements from the FSA's release of PS174 and PS159 last week, according to brokers.
The original proposal that brokers must hold PI cover of the higher of either £700,000 or three times annual income has been watered down. The new rules require brokers to hold minimum cover of £700,000 per claim, and aggregate cover of the higher of either £1m or 10% of annual income, subject to an upper limit of £30m. In PS174, the FSA said the change was made to "ease capacity problems".
Broker Network managing director Grant Ellis said the changes would leave brokers more exposed to failures as a greater amount of any loss would flow to the Financial Services Compensation Scheme. "Smaller brokers can have low PI limits but can still have multi-million pound claims against them," Ellis said.
Owner of broker EH Ranson, Simon Bolam, who represents general business intermediaries on the FSA's Small Business Practitioner Panel, agreed. "Even for a small firm there is a potential for making a monumental error," Bolam said.
Acting Biba chief executive David Hough said that Biba was "not overly happy" with the PI changes due to the potential exposure if a large broker failed. "We are concerned that that's not sufficiently high for medium sized brokers upwards," he said.
While the decision to extend the scope of activities that ARs can carry out was welcomed, Ellis said that the Broker Network would not be offering its members AR status.
Ellis added that the decision to allow ARs to have multiple principals, with a requirement for one principal to take ultimate responsibility for complaints, would not be popular, and as a result, very few principal agents will allow their ARs to have more than one principal. Hough agreed: "Commercially I can see that not being terribly attractive."