PII helps to ensure that a firm has the resources to meet valid claims from customers and others even when the firm could not afford to do so out of its own resources. For example, a firm may agree to advise a customer but do so in a way that results in the customer acquiring a financial product that is not suitable. Most authorised insurance and mortgage intermediaries are required to maintain PII cover that satisfies the requirements in PRU 9.2. If you do not have compliant PII cover you risk breaching these rules and threshold condition 4, which is the requirement to maintain adequate resources.

This chapter explains:

1. (1)

   which mortgage and insurance intermediaries need to hold PII;

2. (2)

   the level of cover a PII policy must provide;

3. (3)

   the level of excess a PII policy must have; and

4. (4)

   the risks a PII policy must cover.

There are some worked examples at the end of this Chapter to help you calculate what level of cover and what level of excess your firm's PII policy is required to have.

The PII requirements for mortgage intermediaries and insurance intermediaries are different. If your firm carries on both regulated activities then it will need to comply with the PII requirements for each one. However, this does not necessarily mean that you will need to purchase two or more separate policies. You could, for example, purchase one policy that covers all your activities, which contains separate limits of indemnity and excesses for each activity.

The requirements are minimum requirements. In line with Principles 3 and 4 (see the table at Part I, paragraph 3.1.3), your firm's senior management is responsible for maintaining adequate financial resources at all times. So, the onus will be on your senior management to ensure that the firm has such additional financial resources over and above our requirements as they consider are necessary.

Mortgage intermediaries must hold PII cover unless:

1. (1)

   the intermediary has net tangible assets of more than £1 million; or

2. (2)

   the intermediary has a 'comparable guarantee' from an FSA authorised firmwith net tangible assets of £1 million.

Insurance intermediaries must hold PII cover unless the intermediary has a 'comparable guarantee' from an FSA authorised firm with net tangible assets of £10 million.

Broadly, a 'comparable guarantee' is an agreement by the guarantor to cover any claims that would be covered by a PII policy that satisfies our rules. You should be aware that, if your firm is a member of a group of companies that contains an FSA authorised firm, any comparable guarantee must come from that firm. For full details about whether your firm does or does not need to hold PII see PRU 9.2.1 R.

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 intermediariesinvolved in a transaction. Your firm's income does not, however, include any amounts due to 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 II, 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.

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.

Broadly, you can obtain a PII policy from:

1. (1)

   any insurance company authorised to underwrite professional indemnity insurance policies in the European Economic Area (EEA); or

2. (2)

   a non-EEA insurance company authorised in a Zone A country, the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

(For further details see PRU 9.2.7 R and PRU 9.2.9 G. 'Zone A country' is defined in the Handbook Glossary.)

Our rules allow firms to benefit from a policy that covers more than one firm, provided that:

1. (1)

   the minimum levels of cover of the policy are calculated on the basis of the combined annual income of all the firms named on the policy; and

2. (2)

   each firm named on the policy has the benefit of the required minimum levels of cover.

However, the maximum level of excess permitted must be calculated on the basis of the annual income of each firm individually, not the combined income of all the firms covered by the policy. So if the excess on the policy exceeds the maximum permitted for a firm named on the policy it will not meet our requirements. In such a case it may be open to a firm to satisfy the alternative requirement of holding additional capital as explained at paragraph 8.3.10 above. Example 2 below shows how to calculate the required minimum levels of cover and the maximum permitted level of excess for a PII policy that covers more than one firm.

As well as these requirements, if you decide to participate in such an arrangement you should ensure that the PII policy meets your needs. This will include assessing that the combined levels of cover are appropriate. Also, you should ensure that you are a named party to the PII policy, to avoid any doubt about whether or not you are covered by the policy.

Example 1: insurance intermediary that does not hold client money

An insurance intermediary that does not hold client money, with annual income of £50,000 receives a quote for a PII policy that has a general excess of £5,000.

Minimum level of cover: €1,000,000 for a single claim AND €1,500,000 for aggregate claims.

The policy contains the following limits: £725,000 for a single claim AND £1,250,000 for aggregate claims.

Assuming an exchange rate of 1.4 when the terms of the policy are agreed, these levels of cover would be sufficient as they convert to €1,015,000 for a single claim and €1,750,000 for aggregate claims.

Excess levels: The maximum permitted excess level is £2,500 (as this is higher than 1.5% of annual income), so the excess on the policy is too high and the policy would not meet our requirements. Using the table in PRU 9.2.21 R shows that the firm would need to hold additional capital of £5,000. The extract from the table below shows how this is calculated.

Example 2: two insurance intermediaries that both hold client money

Two unconnected insurance intermediaries, who both hold client money, wish to be covered by the same policy. Firm A has annual income of £1,250,000 and Firm B has annual income of £14,750,000. The policy quote has a general excess of £50,000.

Minimum level of cover required: €1,000,000 for a single claim AND £1,600,000 for aggregate claims. (The policy must cover single claims for €1,000,000 and it must cover aggregate claims for 10% of combined annual income (i.e. £1.6m), as this is greater than €1,500,000 (approx £1,100,000).)

Excess levels: As the £50,000 excess level is less than 3% of the annual income of firm B, the excess is acceptable for firm B. For firm A, the maximum permitted excess level is £37,500 (3% of £1,250,000). So the excess on the policy is too high for firm A and the policy would not meet our requirements. Using the table in PRU 9.2.22 R shows that firm A would need to additional capital of £16,000. The extract from the table below shows how this is calculated.

Example 3: a mortgage intermediary that does not hold client money

A mortgage intermediary, that does not handle client money, has annual income of £3,000,000, receives a quote for a PII policy that has a general excess of £2,500.

Minimum level of cover required: £300,000 for a single claim OR £500,000 for aggregate claims (The policy must either cover single claims for 10% of annual income (i.e. £300,000) as this is higher than £100,000 or it must cover aggregate claims for £500,000, as this is higher than 10% of annual income.)

Excess levels: As the £2,500 excess level is less than the maximum permitted (1.5% of £3 million), the firm would not need to hold additional capital.