When an insurance firm takes on regulatory responsibilities for a smaller company there’s potential for professional indemnity (PI) insurance for both businesses to get complicated.
To make the relationship a success, it’s critical each firm understands what cover they need and how the agreement impacts their premiums and excess.
What is an FCA network?
Known as Appointed Representatives (ARs), those firms operate under the umbrella of another company – known as the principal – which assumes legal responsibility for compliance.
FCA network structures can vary in size, scope and organisation and it’s easy to overlook the PI risks.
The PI basics
There are different ways to organise PI cover, but essentially principal firms are responsible for AR activities so must have PI insurance to cover the network.
Traditional networks
In traditional networks, ARs provide advice or services on behalf of the principal firm.
Because the principal firm is not advising in its own right, the cost of PI insurance is usually shared between the ARs.
How it is shared depends on the network: it could be divided in proportion to the fee income of each AR; or by the perceived risk each AR brings to the shared policy; or it is absorbed within the network charges, commission or fee sharing arrangements.
Non-traditional networks
Sometimes the network is less traditional and a principal firm will just have a handful of ARs.
In this case, the principal firm will likely incur additional costs for adding ARs to their insurance policy but those costs can be passed on to the AR.
Does each AR need its own policy?
The buck stops with the principal firm so strictly speaking, for regulatory purposes, ARs don’t need their own PI.
However, it’s not unusual for principals to require ARs to have their own policy as part of the deal. It doesn’t mean the principal can avoid securing PI to cover the network, but it provides options when there’s a claim.
When each company is separately covered, the appropriate policy can be applied and the principal offers contingency cover if the AR isn’t adequately insured. This structure keeps premiums low for the principal and ensures each company is accountable for its actions.
Who picks up the excess?
Any policy will come with an excess and it’s important to understand which company is liable, the principal or the AR.
At Whinney Insurance, we advise the AR covers the excess, taking responsibility for their own actions and advice.
What happens when there’s a split?
Like any relationship, sometimes a network splits. ARs will sometimes leave networks to join another, or to start their own authorised firm because they are scaling up.
Regardless of how the divorce happens, it’s crucial each party is clear about responsibilities.
When an AR leaves a network, past advice given under the authority of a previous principal remains the responsibility of that principal. Therefore ARs need run-off insurance or should expect to continue contributing to the principal’s insurance costs or cover excesses for past liabilities.
Our top tip – be transparent
FCA networks can work well but only with properly structured PI insurance.
Principals and ARs must be transparent, particularly regarding excesses and departures. Without transparency, unknown costs and complications can arise years after the advice was provided.
