It is compulsory in terms of the Financial Advisory and Intermediary Services act of 2002 (FAIS Act) for all Financial Services Providers (FSPs) to have Professional Indemnity (PI) cover. The FAIS Act stipulates that FSPs should have a suitable level of PI insurance in place.
It is the duty of the FSP to assess the risk
associated with their own professional services and also to determine what
level of cover is required over and above the minimum levels set
MINIMUM LEVELS:
þ CAT I OR IV (FSP RECEIVES CLIENT FUNDS)
Suitable guarantee of minimum of R1 million or PI and
Fidelity cover minimum R1 million
þ CAT II (FSP DOESN’T RECEIVE CLIENT FUNDS)
Suitable guarantee of minimum of R1 million or PI
cover minimum R1 million
þ CAT II (FSP RECEIVES CLIENT FUNDS)
Suitable guarantee of minimum of R5 million or PI and
Fidelity cover minimum R5 million
þ CAT IIA (FSP DOESN’T RECEIVE CLIENT FUNDS)
Suitable guarantee of minimum of R5 million or PI
cover for a minimum R5 million
þ CAT IIA (FSP RECEIVES CLIENT FUNDS)
Suitable guarantee of minimum of R5 million or PI and
Fidelity cover minimum of R5 million
þ CAT III
Suitable guarantee of minimum of R5 million or PI and
Fidelity cover minimum R5 million
FSPs require PI cover in order to protect themselves
against unforeseeable and unexpected PI exposures. PI cover is intended to
protect FSPs against legal costs and claims for damages to third parties which
may arise out of an act, omission or breach of professional duty in the course
of its business. PI risk exposures stem from the provision of professional
advice to insurance policy holders such as individuals and businesses. The FSPs
PI cover will protect against; Negligent errors, negligent omissions; Negligent
wrongful acts; Negligent breach of professional duty or contracts; Breach of
respective warranty; Breach of trust committed in good faith; Defamation or
injuria; Loss or damage to any documents; Related defense costs and any other costs
incurred in mitigating or preventing a claim that is likely to occur.
If an incident were to occur that results in a
financial loss to a third party, and legal action is taken against your FSP to
recover losses, your PI insurance will protect both the assets and reputation
of your FSP.
The most important aspect to consider when taking out PI cover is to
determine whether the minimum cover will be sufficient. Considering the number
of complaints that are being heard by the FAIS Ombud, it becomes apparent that
South African consumers are very keen to take FSPs to court if they feel they
are not being treated fairly. Our society is a lot more litigious than we both
like to believe, or remember. Insurance and Financial products are multifaceted
and there will be a time when not all exclusions, definitions or some minor
details are explained to a consumer, then Murphy’s Law interjects, and your PI
cover comes into play. The cover will ensure that you are guided accordingly
and legal advice is provided should you need to be defended.
The requirement for how much you may need when that gloomy day
should come, may not be sufficient. As the claim’s frequencies are becoming
higher and the severity of these claims are also increasing, having adequate PI
cover has become overpoweringly important. More claims result in more
litigation between parties but the defense costs are covered by your PI policy,
but are limited to the amount of cover you have purchased.
Litigation usually consumes a huge amount of the limit available to the FSP and
this could leave you underinsured for a certain portion of the loss incurred.
HOW MUCH PI COVER IS ENOUGH? WHICH FACTORS DO
YOU NEED TO CONSIDER?
1.
SIZE
OF YOUR BOOK:
This is the first point of reference. Does your FSP
advise 10, 100 or 1000 clients? How many individual policies does your FSP have
on its books? The question is really relating to how many times your FSP could
potentially be, or have given negligent advice. The probability increasing with
the greater the number of clients your FSP has, and the greater the number of
products your FSP advises those clients on.
2.
COMPLEXITY
OF FINANCIAL PRODUCTS:
All insurance products and investment schemes have a degree of difficulty
to them, some more than others. Some products may be less frequently dealt with
and here you will need to make sure you are updated with the latest
developments. It is vital that you remember that a potential claim may arise
from how well your client understood the financial product and as an
intermediary providing financial advice and intermediary services, the
responsibility falls upon your shoulders to ensure you explain to your clients
what they are buying into. Therefore, it is expected that each representative
within the FSP is capable in respect of giving advice on the products or
investments being sold.
3.
SUM
INSURED:
The question here is would your PI Cover amount be
sufficient to cover a PI claim. In this regard the idea is to ensure that the
PI limit that your FSP has, is sufficient enough to cover the highest limit of
indemnity that your FSP has brokered or highest value of investment placed
after considering all other factors described above.
4.
NATURE
OF THE FINANCIAL SERVICES:
Do you render financial advice and/or intermediary
services or only one of the two? The answer to this question is important
especially when you need to determine whether the claim is as a result of incorrect
advice being given, or the correct advice being given, but your FSP failed to
render the correct documents to the third parties insurers. The discretionary
mandate that your FSP has been given by a client is also a very important
consideration here. Ensuring that your FSP does not act outside of this
mandate, or does not fulfil all the requirements of this mandate is crucial.
5.
DEGREE
OF RISK INVOLVED:
The degree of the risk involved really relates to all
of the above factors when deciding on whether or not your FSP is adequately
protected against the risks involved.
IN SUMMARY, WHEN AN FSP REVISITS ITS PI COVER
ON ITS FSP, IT IS WELL WORTH CONSIDERING AND EVALUATING ALL THESE FACTORS FIRST
TO ENSURE THAT YOU ARE SUFFICIENTLY PROTECTED
-Andrea Venter