The FSB published the information below in FAIS Newsletter 15 of 31 August 2013. It covers some important points concerning PI cover, and addresses questions we receive on a regular basis. We recommend that readers use this information to assess their own situation.
The situation in the UK has become a major issue, with the cost of PI cover skyrocketing in the light of claims. I recently spoke to a category II FSP in Cape Town who cancelled his licence in view of the crippling costs of running his business. One of these cost items was PI Cover.
Professional Indemnity Insurance for Financial Services Providers
Board Notice 123 of 2009 of FAIS requires that FSPs should have an adequate level of PI insurance. It is the responsibility of the FSP to assess the risk associated with their particular business for professional services and to determine the level of PI insurance cover required over and above the minimum levels set by the FSB.
From the client’s perspective, PI cover only protects the FSP concerned. What PI Insurance provides for the client is a level of assurance that, in the event of a successful claim against the insured, (i.e. the FSP) arising out of negligent performance or breach of contractual duty, that there is some lessening of the risk of insufficient assets being available to meet the claim.
FSPs must ensure that the following risks are covered in their PI policies:
- Legal defence costs;
- Fidelity guarantee;
- Loss of documents;
- Staff dishonesty;
- Computer Crime.
As with most insurance products, exclusions are incorporated into PI policies. We recommend that all FSPs familiarise themselves with the exclusions contained in their PI schedule. The most notable exclusions, of which FSPs should be aware of are:-
- Fines and penalties (including contractual penalty clauses);
- Support staff extension;
- Claims preparation.
The FAIS legislation prescribes the minimum PI cover amount that specific FSPs should hold. It is important to note that this is a “minimum” amount that should be in place and that FSPs need to determine whether a higher amount is required, based on the nature of their business.
In assessing the level of risk, the following general factors should be taken into account:
- Nature of the financial services provided (services vary from pure advice to managing funds);
- Size and complexity of the business (assets under management, type of product , e.g. Hedge Funds);
- Extent of Risk involved;
- Other types of insurance cover in place (e.g. Liability cover).
It may be wise to follow the advice you give to your clients, and make sure that you are not under-insured.