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IPRU-INV 13.1 APPLICATION, GENERAL REQUIREMENTS AND PROFESSIONAL INDEMNITY INSURANCE REQUIREMENTS

Application

IPRU-INV 13.1.1RRP

This chapter applies to a firm which is a personal investment firm as set out in the table below1.

    1Type of personal investment firm

    Application of this Chapter

    A personal investment firm which is an exempt CAD firm

    13.1, 13.1A, 13.13 and 13.14

    A personal investment firm which is a category B firm1

    13.1 and 13.13 to 13.151

    1

    1

  1. (2)

    [deleted]1

  2. (3)

    [deleted]1

Purpose

IPRU-INV 13.1.2GRP

This chapter amplifies threshold condition 2D1 (Appropriate1 resources) by providing that a firm must meet, on a continuing basis, a basic solvency requirement and a minimum capital resources requirement. This chapter also amplifies Principles 3 and 4 which require a firm to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems and to maintain adequate financial resources by setting out capital resources for a firm according to the regulated activity or activities it carries on.

IPRU-INV 13.1.3GRP

Although financial resources and appropriate systems and controls can generally mitigate operational risk, professional indemnity insurance has a role in mitigating the risks a firm faces in its day-to-day operations, including those arising from not meeting the legally required standard of care when advising on investments. The purpose of the rules in this section is also to ensure that a firm has in place the type, and level, of professional indemnity insurance necessary to mitigate these risks. This includes, in the case of a UK firm exercising an EEA right, cover for breaches of obligations imposed by or under laws, or provisions having the force of law, in each EEA State in which the firm carries on business.

General capital resources and solvency requirements

IPRU-INV 13.1.4RRP

A firm must at all times:

  1. (1)

    have and maintain capital resources at least equal to its relevant capital resources requirement1; and

  2. (2)

    be able to meet its liabilities as they fall due.

Capital resources: general accounting principles

IPRU-INV 13.1.4ARRP
  1. (1)

    1Unless a rule provides otherwise, a firm must:

    1. (a)

      recognise an asset or liability; and

    2. (b)

      measure the amount of that asset or liability,

    by using the accounting principles it applies in preparing the firm's reporting form in (2).

  2. (2)

    The accounting principles are referred to in:

    1. (a)

      the Notes for completion of the Retail Mediation Activities Return (RMAR) (under the heading “Accounting Principles”) in SUP 16 Annex 18BG for a category B firm; and

    2. (b)

      the Guidance notes for data items in FSA032 (under the heading “Defined terms”) in SUP 16 Annex 25AG for an exempt CAD firm.

Requirement to hold professional indemnity insurance

IPRU-INV 13.1.5RRP

A firm must take out and maintain at all times professional indemnity insurance that is at least equal to the requirements in this section from:

  1. (1)

    an insurance undertaking which is authorised to transact professional indemnity insurance in the EEA; or

  2. (2)

    a person of equivalent status in:

    1. (a)

      a Zone A country;

    2. (b)

      the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

[Note: Article 4(3) of the Insurance Mediation Directive]

IPRU-INV 13.1.6RRP

An exempt CAD firm is not required to effect and maintain professional indemnity insurance unless it chooses this option (see 13.1A).

Comparable guarantee

IPRU-INV 13.1.7RRP
  1. (1)

    A firm is not required to effect or maintain professional indemnity insurance if a bank, building society or an insurer provides the firm with a comparable guarantee.

  2. (2)

    If the firm is a member of a group in which there is a bank, building society or an insurer, the firm's comparable guarantee must be from that bank, building society or insurer.

  3. (3)

    A comparable guarantee means an enforceable, written agreement on terms at least equal to those required by IPRU-INV 13.1.9R to 13.1.13R, as appropriate.

Relevant income

IPRU-INV 13.1.8RRP

The term "relevant income" in this section refers to all income received or receivable which is commission, brokerage, fees or other related income, whether arising from the firm's permitted activities or not, for the last accounting year prior to inception or renewal of the professional indemnity insurance policy ("the policy").

Policy terms

IPRU-INV 13.1.9RRP

The policy must incorporate terms which are appropriate and must make provision for cover in respect of any claim for loss or damage, for which the firm may be liable as a result of an act or omission by:

  1. (1)

    the firm; or

  2. (2)

    any person acting on behalf of the firm including employees, appointed representatives or its other agents.

Limits of indemnity

IPRU-INV 13.1.10RRP

If the firm is an IMD insurance intermediary, whether or not it is also an exempt CAD firm, the appropriate minimum limits of indemnity per year are no lower than:

  1. (1)

    EUR 1,120,200 for a single claim against the firm; and

  2. (2)

    EUR 1,680,300 in the aggregate.

[Note: Article 4(3) of the Insurance Mediation Directive]

IPRU-INV 13.1.11RRP

If the firm is an exempt CAD firm that maintains professional indemnity insurance under 13.1A.3(1)(b), the appropriate minimum limits of indemnity per year are no lower than:

  1. (1)

    EUR 1,000,000 for a single claim against the firm; and

  2. (2)

    EUR 1,500,000 in the aggregate.

[Note: Article 67(3) of MiFID and article 31(1) of the CRD (see also IPRU-INV 13.1A.3R2)]

IPRU-INV 13.1.12RRP

If the firm is both an IMD insurance intermediary and an exempt CAD firm that maintains professional indemnity insurance under 13.1A.4(1)(b), the appropriate additional limits of indemnity to 13.1.10R per year are no lower than:

  1. (1)

    EUR 500,000 for a single claim against the firm; and

  2. (2)

    EUR 750,000 in the aggregate.

[Note: Article 67(3) of MiFID and article 31(2) of the CRD (see also IPRU-INV 13.1A.4R2)]

IPRU-INV 13.1.13RRP

If the firm is not an IMD insurance intermediary or an exempt CAD firm, then the following limits of indemnity apply:

  1. (1)

    if the firm has relevant income of up to £3,000,000, no lower than £500,000 for a single claim against the firm and £500,000 in the aggregate; or

  2. (2)

    if the firm has relevant income of more than £3,000,000, no lower than £650,000 for a single claim against the firm and £1,000,000 in the aggregate.

IPRU-INV 13.1.14GRP

Article 4(7) of the Insurance Mediation Directive requires the limits of indemnity to be reviewed every five years to take into account movements in European consumer prices. These limits will therefore be subject to further adjustments on the basis of index movements advised by the European Commission.

IPRU-INV 13.1.15RRP

If a policy is denominated in any currency other than euros, a firm must take reasonable steps to ensure that the limits of indemnity are, when the policy is effected (i.e. agreed) and at renewal, at least equivalent to those denominated in euros.

IPRU-INV 13.1.16GRP

A firm should consider whether the overall cover is adequate taking account of 13.1.22G(2) and whether the firm should seek additional cover or legal expenses insurance. (Legal defence costs are costs of defence against claims that fall under the terms of the policy.)

IPRU-INV 13.1.17GRP

The cover provided by the policy should be wide enough to include the liability of the firm, its appointed representatives, its tied agents, employees and its agents for breaches under the regulatory systems or civil law. If the firm operates outside the United Kingdom then the policy should cover other regulatory requirements imposed under the laws of other countries in which the firm operates.

Policies providing for more than one firm

IPRU-INV 13.1.18RRP

If the policy provides cover to more than one firm then:

  1. (1)

    The relevant income for calculating the limits of indemnity is that of all the firms named in the policy combined;

  2. (2)

    each firm named in the policy must have the benefit of the minimum limits of indemnity as required in this section; and

  3. (3)

    each firm named in the policy must notify the FCA1 if the aggregate cover in the policy falls below the minimum limits of indemnity.

Limits of indemnity – additional requirements

IPRU-INV 13.1.19RRP

In addition to the specific requirements in 13.1.9R to 13.1.13R, the policy must make provision for the following:

  1. (1)

    for a firm with relevant income of more than £6,000,000, the aggregate limit identified in the table below:

  2. Relevant income is (£)

    Minimum aggregate limit of indemnity

    more than

    up to

    (£)

    6,000,000

    7,000,000

    1,150,000

    7,000,000

    8,000,000

    1,300,000

    8,000,000

    9,000,000

    1,450,000

    9,000,000

    10,000,000

    1,600,000

    10,000,000

    12,500,000

    2,000,000

    12,500,000

    15,000,000

    2,400,000

    15,000,000

    17,500,000

    2,800,000

    17,500,000

    20,000,000

    3,150,000

    20,000,000

    25,000,000

    3,800,000

    25,000,000

    30,000,000

    4,250,000

    30,000,000

    35,000,000

    4,500,000

    35,000,000

    40,000,000

    4,750,000

    40,000,000

    50,000,000

    5,500,000

    50,000,000

    60,000,000

    6,000,000

    60,000,000

    70,000,000

    6,750,000

    70,000,000

    80,000,000

    7,250,000

    80,000,000

    90,000,000

    7,750,000

    90,000,000

    100,000,000

    8,500,000

    100,000,000

    150,000,000

    11,250,000

    150,000,000

    200,000,000

    14,000,000

    200,000,000

    250,000,000

    17,000,000

    250,000,000

    300,000,000

    19,750,000

    300,000,000

    n/a

    22,500,000

  3. (2)

    full retroactive cover in respect of the kinds of liabilities described in 13.1.9R for claims arising from work carried out by the firm, or on its behalf, in the past; and

  4. (3)

    cover in respect of Ombudsman awards made against the firm.

Limitations

IPRU-INV 13.1.20RRP

The policy must not be subject to conditions or exclusions which unreasonably limit its cover (whether by exclusion of cover, by policy excesses or otherwise).

Exclusions

IPRU-INV 13.1.21RRP

The policy must not:

  1. (1)

    exclude any type of business or activity that has been carried out by the firm in the past or will be carried out by the firm during the time for which the policy is in force; or

  2. (2)

    exclude liabilities which are identified or crystallised as a result of regulatory action against the firm (either individually or as a member of a class of authorised persons);

unless the firm holds additional capital resources, in accordance with 13.1.23R.

IPRU-INV 13.1.22GRP
  1. (1)

    The FCA1 considers it reasonable for a firm's policy to exclude cover for:

    1. (a)

      specific business lines if that type of business has not been carried out by the firm in the past and will not be carried out by the firm during the life of the policy; or

    2. (b)

      specific claims that have been previously notified to the firm's insurer and claimed for under another policy.

  2. (2)

    The FCA1 does not consider it reasonable for a firm's policy to treat legal defence costs cover as part of the limits of indemnity if this reduces the cover available for any individual substantive claim.

Additional capital resources - exclusions

IPRU-INV 13.1.23RRP

The amount of additional capital resources that a firm must hold as a result of an exclusion under IPRU-INV 13.1.21R1 must1 be calculated by referring to the firm's relevant income in the following table:

Relevant income £000s

Minimum additional capital resources

more than

up to

£000s

(Notes 1 and 2)

0

100

5

100

200

12

200

300

18

300

400

21

400

500

23

500

600

25

600

700

27

700

800

28

800

900

30

900

1,000

31

1,000

1,500

37

1,500

2,000

42

2,000

2,500

46

2,500

3,000

51

3,000

3,500

55

3,500

4,000

59

4,000

4,500

63

4,500

5,000

67

5,000

6,000

73

6,000

7,000

79

7,000

8,000

85

8,000

9,000

90

9,000

10,000

95

10,000

100,000

95y

100,000

n/a

950

Note 1 - For firms with relevant income of more than £10m but up to £100m value y is calculated by relevant income/ £10m.

Note 2 - The calculation of a firm's capital resources is set out in sections 13.1A to 13.151 (see IPRU-INV 13.1.1R1 for application of these sections to an exempt CAD firm or1 a category B firm1).

IPRU-INV 13.1.24GRP

The firm should hold additional capital resources in excess of those minimum amounts set out in the table in 13.1.23R where the required amounts of additional capital resources provide insufficient cover, taking into account the firm's individual circumstances.

Excess level

IPRU-INV 13.1.25RRP

The policy must not make provision for payment by the firm of an excess on any claim of more than £5,000, unless the firm holds additional capital resources, in accordance with 13.1.27R.

IPRU-INV 13.1.26R

The reference to "excess" is to the highest excess level required to be paid under the policy unless that excess relates to a type of business that has not been carried out by the firm in the past. In those circumstances, the reference is to the next highest excess level required by the policy applicable to a type of business that has been carried out by the firm in the past.

Additional capital resources - excess

IPRU-INV 13.1.27RRP

The amount of additional capital resources that a firm must hold where the policy's excess on any claim is more than £5,000 must be calculated by referring to the firm's relevant income and excess obtained in the following table:

All amounts are shown in £000s (Notes 1 and 2)

Relevant income is

Excess obtained, up to and including

more than

up to

5

10

15

20

25

30

40

50

75

100

150

200+

0

100

0

4

7

9

12

14

18

21

28

34

45

54

100

200

0

7

11

14

17

20

25

29

38

46

59

70

200

300

0

9

14

18

21

24

30

35

45

54

69

82

300

400

0

11

16

21

24

28

34

39

50

60

77

91

400

500

0

13

18

23

27

30

37

43

55

66

83

98

500

600

0

14

20

25

29

33

40

46

59

70

89

105

600

700

0

16

22

27

31

35

42

49

63

74

94

111

700

800

0

17

23

28

33

37

45

52

66

78

99

117

800

900

0

18

24

30

35

39

47

54

69

82

103

122

900

1,000

0

19

26

31

36

41

49

56

72

85

107

126

1,000

1,500

0

23

31

37

43

48

57

66

83

99

124

146

1,500

2,000

0

26

35

42

48

54

64

73

93

109

138

161

2,000

2,500

0

29

38

46

53

59

71

81

102

121

152

179

2,500

3,000

0

32

42

51

58

65

78

89

112

132

166

195

3,000

3,500

0

35

46

55

63

71

84

96

121

142

179

210

3,500

4,000

0

38

50

59

68

76

90

102

129

152

191

223

4,000

4,500

0

41

53

63

72

80

95

108

137

161

202

236

4,500

5,000

0

43

56

67

76

85

100

114

144

169

212

248

5,000

6,000

0

48

62

73

84

93

110

125

157

185

231

271

6,000

7,000

0

52

67

79

90

101

119

135

169

199

249

291

7,000

8,000

0

56

72

85

97

107

127

144

181

212

265

310

8,000

9,000

0

59

76

90

103

114

134

152

191

224

280

328

9,000

10,000

0

63

80

95

108

120

141

160

201

236

294

344

10,000

100,000

0

63y

80y

95y

108y

120y

141y

160y

201y

236y

294y

344y

100,000

n/a

0

630

800

950

1080

1200

1410

1600

2010

2360

2940

3440

Note 1 - For firms with relevant income more of £10m but up to £100m value y is calculated by relevant income/ £10m.

Note 2 - The calculation of a firm's capital resources is set out in sections 13.1A to 13.151 (see IPRU-INV 13.1.1R1 for application of these sections to an exempt CAD firm or1 a category B firm).

Notification requirements

IPRU-INV 13.1.28RRP

A firm must notify the FCA1 immediately if it becomes aware, or has information which reasonably suggests, that any of the following matters in relation to its professional indemnity insurance has occurred, may have occurred or may occur in the foreseeable future:

  1. (1)

    professional indemnity insurance cannot be obtained within 28 days of the inception or renewal date;

  2. (2)

    professional indemnity insurance is cancelled;

  3. (3)

    the amount of aggregate cover is exhausted;

  4. (4)

    the firm commences business lines for which it had not obtained cover;

  5. (5)

    the firm is relying on a policy cover for more than one firm; or

  6. (6)

    the firm is relying on a comparable guarantee provided in accordance with the rules in this chapter.

IPRU-INV 13.1.29GRP
  1. (1)

    1For the purposes of the provisions relating to professional indemnity insurance, “additional capital resources” means readily realisable own funds or capital resources under IPRU-INV 13.15.3R, depending on the type of firm1.

  2. (2)

    1The FCA1 expects items included in own funds or capital resources under IPRU-INV 13.15.3R, depending on the type of firm,1 to be regarded as “readily realisable” only if they can be realised, at any given time, within 90 days.