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PRU 9.2 Professional indemnity insurance requirements for insurance and mortgage mediation activities

Application

PRU 9.2.1R

  1. (1)

    This section applies to a firm with Part IV permission to carry on any of the activities in (2) unless (3), (4), (5) or (6) applies.

  2. (2)

    The activities are:

    1. (a)

      insurance mediation activity;

    2. (b)

      mortgage mediation activity.

  3. (3)
    1. (a)

      In relation to insurance mediation activity, this section does not apply to a firm if another authorised person which has net tangible assets of more than ?10 million provides a comparable guarantee.

    2. (b)

      If the firm is a member of a group in which there is an authorised person with net tangible assets of more than ?10 million, the comparable guarantee must be from that person.

    3. (c)

      A 'comparable guarantee' means a written agreement on terms at least equal to those in PRU 9.2.10 R to finance the claims that might arise as a result of a breach by the firm of its duties under the regulatory system or civil law.

  4. (4)

    In relation to mortgage mediation activity, this section does not apply to a firm if:

    1. (a)

      it has net tangible assets of more than ?1 million; or

    2. (b)

      the comparable guarantee provisions of (3) apply (as if the firm was carrying on insurance mediation activity) but substituting ?1 million for ?10 million in (a) and (b).

  5. (5)

    In relation to all the activities in (2), this section does not apply to:

    1. (a)

      an insurer; or

    2. (b)

      a managing agent; or

    3. (c)

      a firm to which IPRU(INV) 13.1.4(1) (Financial resource requirements for personal investment firms: requirement to hold professional indemnity insurance) applies.

  6. (6)

    In relation to mortgage mediation activity, this section does not apply to an authorised professional firm:

    1. (a)

      which is subject to IPRU(INV) 2.3.1 (Professional indemnity insurance requirements for authorised professional firms); and

    2. (b)

      whose mortgage mediation activity is incidental to its main business.

PRU 9.2.2G

The definition of insurance mediation activity is any of several activities 'in relation to a contract of insurance' which includes a contract of reinsurance. This section, therefore, applies to a reinsurance intermediary in the same way as it applies to any other insurance intermediary.

Purpose

PRU 9.2.3G

The purposes of this section are to:

  1. (1)

    implement article 4.3 of the Insurance Mediation Directive in so far as it requires insurance intermediaries to hold professional indemnity insurance, or some other comparable guarantee, against any liability that might arise from professional negligence; and

  2. (2)

    meet the regulatory objectives of consumer protection and maintaining market confidence by ensuring that firms have adequate resources to protect themselves, and their customers, against losses arising from breaches in its duties under the regulatory system or civil law.

PRU 9.2.4G

Any breach in the duty of a firm or of its agents under the regulatory system or civil law can give rise to claims being made against the firm. Professional indemnity insurance has an important role to play in helping to finance such claims. In so doing, this section amplifies threshold condition 4 (Adequate resources). This threshold condition provides that a firm must have, on a continuing basis, resources that are, in the opinion of the FSA, adequate in relation to the regulated activities that the firm carries on.

PRU 9.2.5G

Under Principles 3 and 4 a firm is required to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems and to maintain adequate financial resources. Under Principle 9 a firm is obliged to take reasonable care to ensure the suitability of its advice on investments and discretionary decisions for any customer who is entitled to rely upon its judgement.

PRU 9.2.6G

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 this section is to ensure that a firm has in place the type, and level, of professional indemnity insurance necessary to mitigate these risks.

Requirement to hold professional indemnity insurance

PRU 9.2.7R

A firm must take out and maintain professional indemnity insurance that is at least equal to the requirements of PRU 9.2.10 R from:

  1. (1)

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

  2. (2)

    a person of equivalent status in:

    1. (i)

      a Zone A country; or

    2. (ii)

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

PRU 9.2.8G

The minimum limits of indemnity for a 1firm whose Part IV permission covers more than one regulated activity within the scope of this section is the higher of the limits of indemnity as set out in PRU 9.2.13 R and the limits of indemnity as set out in PRU 9.2.15 R. If the firm opts for a single comparable guarantee to finance the claims which might arise as a result of both activities, the provisions set out in PRU 9.2.1 R (3) apply.1

11
PRU 9.2.9G

A non-EEA firm (such as a captive insurance company outside the EEA) will be able to provide professional indemnity insurance only if it is authorised to do so in one of the countries or territories referred to in PRU 9.2.7 R (2). The purpose of this provision is to balance the level of protection required for the policyholder against a reasonable level of flexibility for the firm.

Terms to be incorporated in the insurance

PRU 9.2.10R

In relation to the activities referred to in PRU 9.2.1 R (2), the contract of professional indemnity insurance must incorporate terms which make provision for:

  1. (1)

    cover in respect of claims for which a firm may be liable as a result of the conduct of itself, its employees and its appointed representatives (acting within the scope of their appointment);

  2. (2)

    the minimum limits of indemnity as set out in PRU 9.2.13 R (in relation to insurance mediation activity) and PRU 9.2.15 R (in relation to mortgage mediation activity);

  3. (3)

    an excess as set out in PRU 9.2.17 R to PRU 9.2.22 R;

  4. (4)

    appropriate cover in respect of legal defence costs;

  5. (5)

    continuous cover in respect of claims arising from work carried out from the date on which the firm was given Part IV permission in relation to any of the activities referred to in (2); and

  6. (6)

    cover in respect of Ombudsman awards made against the firm.

PRU 9.2.11G

In relation to PRU 9.2.10 R (1), a firm should be aware that it is responsible for the conduct of all of its employees. The firm's employees include, but are not limited to, its partners, directors, individuals that are self-employed or operating under a contract hire agreement and any other individual that is employed in connection with its business.

PRU 9.2.12G

In relation to PRU 9.2.10 R (1), a firm should be aware that it is responsible for the conduct of all of its appointed representatives.

Minimum limits of indemnity: insurance intermediary

PRU 9.2.13R

If the firm is an insurance intermediary, then 1the minimum limits of indemnity referred to in PRU 9.2.10 R (2) are:

1
  1. (1)

    for a single claim, ?1 million; and

  2. (2)

    in aggregate, ?1.5 million or, if higher, 10% of annual income (see PRU 9.3.42 R) up to ?30 million.

PRU 9.2.14R

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 and at renewal, at least equivalent to those required in PRU 9.2.13 R.

Minimum limits of indemnity: mortgage 1intermediary1

PRU 9.2.15R

If the firm is a mortgage intermediary, then1 the minimum limit of indemnity referred to in PRU 9.2.10 R (2) is the higher of 10% of annual income (see PRU 9.3.42 R) up to ?1 million, and:

1
  1. (1)

    for a single claim, ?100,000; or

  2. (2)

    in aggregate, ?500,000.

Excess

PRU 9.2.16R

In this section, "client assets" includes a document only if it has value, or is capable of having value, in itself (such as a bearer instrument).

PRU 9.2.17R

For a firm which does not hold client money or other client assets, the excess referred to in PRU 9.2.10 R (3) is not more than the higher of:

  1. (1)

    ?2,500; and

  2. (2)

    1.5% of annual income (see PRU 9.3.42 R).

PRU 9.2.18R

For a firm which holds client money or other client assets, the excess referred to in PRU 9.2.10 R (3) is not more than the higher of:

  1. (1)

    ?5,000; and

  2. (2)

    3% of annual income (see PRU 9.3.42 R).

Policies covering more than one firm

PRU 9.2.19R

If a policy provides cover to more than one firm, then in relation to PRU 9.2.13 R, PRU 9.2.14 R and PRU 9.2.15 R:

  1. (1)

    the limits of indemnity must be calculated on the combined annual income (see PRU 9.3.42 R) of all the firms named in the policy; and

  2. (2)

    each firm named in the policy must have the benefit of the minimum limits of indemnity as required in PRU 9.2.13 R or PRU 9.2.15 R.

Additional capital

PRU 9.2.20R

If a firm seeks to have an excess which is higher than the limits in PRU 9.2.17 R (for a firm not holding client money or other client assets) or PRU 9.2.18 R (for a firm holding client money or other client assets), it must hold additional capital as calculated in PRU 9.2.21 R or PRU 9.2.22 R (as appropriate).

PRU 9.2.21R

Table: Calculation of additional capital for firm not holding client money or other client assets (?000's)

Income

Excess obtained up to and including:

More than

Up to

2.5

5

10

15

20

25

30

40

50

75

100

150

200+

0

100

0

5

9

12

14

17

19

23

26

33

39

50

59

100

200

0

7

12

16

19

22

25

30

34

43

51

64

75

200

300

0

7

12

16

20

24

27

32

37

47

56

71

84

300

400

0

0

12

16

21

24

28

34

39

50

60

77

91

400

500

0

0

11

16

21

24

28

34

40

53

63

81

96

500

600

0

0

10

16

20

24

28

35

41

54

65

84

100

600

700

0

0

0

15

20

24

28

35

41

55

67

87

104

700

800

0

0

0

14

19

24

28

35

42

56

68

89

107

800

900

0

0

0

13

18

23

27

35

42

56

69

91

109

900

1,000

0

0

0

0

17

22

27

34

41

57

70

92

111

1,000

1,500

0

0

0

0

0

21

26

34

41

57

71

97

118

1,500

2,000

0

0

0

0

0

0

0

30

38

56

71

98

121

2,000

2,500

0

0

0

0

0

0

0

24

33

53

69

99

126

2,500

3,000

0

0

0

0

0

0

0

0

28

50

68

101

130

3,000

3,500

0

0

0

0

0

0

0

0

0

47

67

101

132

3,500

4,000

0

0

0

0

0

0

0

0

0

43

65

101

133

4,000

4,500

0

0

0

0

0

0

0

0

0

39

62

101

134

4,500

5,000

0

0

0

0

0

0

0

0

0

0

58

99

134

5,000

6,000

0

0

0

0

0

0

0

0

0

0

54

97

133

6,000

7,000

0

0

0

0

0

0

0

0

0

0

0

91

131

7,000

8,000

0

0

0

0

0

0

0

0

0

0

0

84

126

8,000

9,000

0

0

0

0

0

0

0

0

0

0

0

75

120

9,000

10,000

0

0

0

0

0

0

0

0

0

0

0

0

113

10,000

100,000

0

0

0

0

0

0

0

0

0

0

0

0

0

100,000

n/a

0

0

0

0

0

0

0

0

0

0

0

0

0

PRU 9.2.22R

Table: Calculation of additional capital for firm holding client money or other client assets (?000's)

Income

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

7

11

14

17

20

25

30

40

49

64

77

300

400

0

0

9

13

16

19

25

30

40

50

67

81

400

500

0

0

0

11

14

18

24

29

40

51

68

83

500

600

0

0

0

8

12

15

22

28

40

51

69

85

600

700

0

0

0

0

9

13

20

26

39

50

69

86

700

800

0

0

0

0

6

10

17

24

38

49

69

87

800

900

0

0

0

0

0

7

15

22

36

48

69

87

900

1,000

0

0

0

0

0

0

12

19

34

47

68

87

1,000

1,500

0

0

0

0

0

0

0

16

32

45

67

86

1,500

2,000

0

0

0

0

0

0

0

0

18

34

59

81

2,000

2,500

0

0

0

0

0

0

0

0

0

19

48

71

2,500

3,000

0

0

0

0

0

0

0

0

0

6

37

64

3,000

3,500

0

0

0

0

0

0

0

0

0

0

26

55

3,500

4,000

0

0

0

0

0

0

0

0

0

0

14

45

4,000

4,500

0

0

0

0

0

0

0

0

0

0

1

33

4,500

5,000

0

0

0

0

0

0

0

0

0

0

0

21

5,000

6,000

0

0

0

0

0

0

0

0

0

0

0

8

6,000

7,000

0

0

0

0

0

0

0

0

0

0

0

0

7,000

8,000

0

0

0

0

0

0

0

0

0

0

0

0

8,000

9,000

0

0

0

0

0

0

0

0

0

0

0

0

9,000

10,000

0

0

0

0

0

0

0

0

0

0

0

0

10,000

100,000

0

0

0

0

0

0

0

0

0

0

0

0

100,000

n/a

0

0

0

0

0

0

0

0

0

0

0

0

PRU 9.2.23G

PRU 9.3.52 R sets out the items which are eligible to contribute to the capital resources of a firm for the purposes of PRU 9.2.20 R.