PYV warns advisers to check their Professional Indemnity cover is sufficient prior to 1st November MiFID deadline

16/10/2007

Advisers would be wise to ensure that their Professional Indemnity (PI) insurance cover complies with the requirements of the Markets in Financial Instruments Directive (MiFID) which is to come into force on 1st November 2007, according to specialist PI broker, PYV.

Neil Pointon, Chief Executive of the Lloyd's of London insurance broker, observes that the directive could impact on advisers who have the permission to hold client money, as well as those wishing to 'passport' into Europe.

He said: "These new rules take some working out and may catch some firms out and it is important to have access to specialist PI advice so that you do not fall foul of any regulatory requirements."

The Financial Services Authority (FSA) explains that a financial adviser located in the UK, but advising a client elsewhere in the European Economic Area, must comply with the legal requirements of that state.

"It can do that by opting in to MiFID and obtaining a passport for such services - this will prevent it needing authorisation in other member states for those matters," the FSA asserts.

The FSA issued a 'Factsheet' in August 2007 headed 'Financial Advisers and Passporting' and this advises that revised requirements are needed for IFAs which are affected (and are already subject to the Insurance Mediation Directive). Firms undertaking both IMD and MiFID business would be required to hold capital of 25,000 and PII of 1.5m aggregate cover. Firms that are only prepared to hold the previous capital of 10,000 would be required to hold additional PII coverage. Further details of this are in the FSA Handbook.

"Firms should check with their PI insurance providers that they are covered to provide cross-border investment services," the FSA states.

Pointon added: "Although the Factsheet refers to carrying additional limits of 500,000 for any one claim and 750,000 in the aggregate for those firms who do not hold capital of 25,000, in reality, as all UK IFAs are already required to hold 10,000, with today's exchange rates, this leaves those affected who are unwilling to increase their capital with a shortfall of about two-fifths. Whilst it's difficult to be certain when interpreting these rules, it would appear that the maximum increase in Limit brought about by this new regulation will be 215,000 AOC or 320,000 Agg, which converted into sterling translates as approx 150,000 AOC or 225,000 Agg, approximately."

The Association of Independent Financial Advisers notes the wider scope of the directive than was previously anticipated.

Deputy Director General of the organisation Fay Goddard comments: "Any advice relating to MiFID investments given directly to a client while they are residing abroad - whether by phone, email or letter - could potentially breach the rules of that country."

As such, she suggests that firms advising EEA clients may wish to opt into the MiFID regime ahead of the November 1st introduction date by applying for a variation of permission.

For those which choose to do so, the change in activity could have an effect on their PI arrangements, requiring the insurer to be informed to ensure cover is in place for future claims.

PYV are one of the UK's leading providers of professional indemnity insurance. This news article has been produced by Adfero in collaboration with PYV and its unauthorised use is not permitted.

(c) 2007 Adfero Ltd.

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