MIGI 8.3 What must your firm's PII policy cover?

Our rules require a firm's PII policy to provide specified minimum levels of cover. In relation to the firm's mortgage mediation activities, the minimum level is either:

1. (1)

   cover per claim equal to £100,000 or, if higher, 10% of annual income; or

2. (2)

   aggregate cover equal to £500,000 or, if higher, 10% of annual income;

in each case subject to an upper limit of £1m cover.

In relation to the firm's insurance mediation activities, the policy must provide cover of at least €1m per claim. In addition, the policy must provide a minimum aggregate level of cover of €1.5m or, if higher, 10% of annual income, subject to an upper limit of £30m cover.

Insurance intermediaries that hold a policy denominated in sterling will satisfy these limits if they are at least equivalent to our euro requirements based on the exchange rate when the policy is agreed. We do not expect firms to build in a margin or adjust cover in response to exchange rate movements throughout the duration of the policy. Further information about the minimum levels of cover are in PRU 9.2.13 R to PRU 9.2.15 R.

Your firm must calculate the minimum levels of cover required of its PII policy. For this, the only income that counts towards your firm's annual income is that from its insurance mediation activities, mortgage mediation activities, or both, according to its most recent annual financial statement. Income from any other source should not be included in the calculation. So, for example, a motor dealer that is authorised to carry on insurance mediation activities would not need to include its income from selling cars, only its income from selling insurance.

Annual income includes all brokerages, fees, commissions or other related income earned by your firm. It includes commissions and other earnings which your firm pays out of its own income to other persons involved in a transaction (e.g. commission shared with a sub-agent or another intermediary).. Your firm's income does not, however, include any amounts due to another person (e.g. the product provider), which you have collected on its behalf. If your firm has appointed representatives you should include in your income calculation the share of your income that you have paid out to them or that they have retained for their activities for which you have accepted responsibility as principal.

Any commission income your firm receives from a third party premium finance firm need not be included in the calculation of your firm's minimum levels of cover.

For full details of what we mean by annual income, see PRU 9.3.42 R to PRU 9.3.50 R.

Our rules also specify the maximum levels of excess on a firm's PII policy (although, as explained below, if the firm holds additional capital it may increase the level of excess). The excess limits are the same for policies covering mortgage mediation activities and insurance mediation activities. However, firms that hold client money or client title documents (such as bearer instruments) are permitted a higher maximum excess than those that do not (because they will be required by our rules to hold more capital). The details are set out in the table below. More information on the rules that apply to insurance intermediaries when handling client money are in Part III, Chapter 2. There are no specific rules governing how mortgage intermediaries must handle client money, but they must comply with our overarching Principles (see Part I, Chapter 3) and other generally applicable rules.

A firm can hold an excess that is higher than the limits in the table above provided it holds more capital than the minimum required by our rules (see Part I, Chapter 7). So you can negotiate how much risk to transfer to an insurance company and how much to retain, but you will have to hold additional own funds in line with the tables in PRU 9.2.21 R and PRU 9.2.22 R.

Your firm's PII policy must provide cover for claims that relate to the firm's insurance mediation activities, mortgage mediation activities, or both. The policy should cover not only claims arising as a result of the conduct of the firm itself, but also that of its employees and appointed representatives. Employees include (but are not limited to) partners, directors, individuals that are self-employed or operating under a contract hire agreement and any other individual that is employed in connection with the business.

PII is a valuable means of providing firms with additional resources if a justified claim is made against the firm. So it is essential that a PII policy covers the potential for negligent acts (for example, mis-selling) and the provision of inappropriate advice by all employees, appointed representatives, agents and indeed directors and partners of the firm. Additionally, our rules require cover for fraudulent acts by employees, agents and appointed representatives of the firm. This is often termed 'dishonesty cover'.

Your firm must have cover for:

1. (1)

   awards determined by the Financial Ombudsman Service (FOS) (for more details about the FOS see Part I, Chapter 18.2); and

2. (2)

   legal defence costs.

The required cover need not all be under the same PII policy. So legal defence costs, for example, could be covered either under your PII policy or under a separate insurance policy.

Our rules specify that your firm's policy must cover all claims that relate to business carried out from the date the firm is authorised by the FSA.