Moonstone: PI in the sky II

We mentioned last week that PI cover is not yet compulsory for all, although it is recommended that it should be considered.

There is currently a discussion document from the FSB doing the rounds to obtain input on the possible implementation of further requirements for such cover, but not all category I FSPs are included, as far as we can determine. Only those "...receiving or holding financial products or funds of or on behalf of a client..." may be required to put in place "...suitable guarantees or professional indemnity and fidelity insurance cover" from R1 million onwards.

A further consolation for those concerned about being forced to take out PI cover is that the recommendation is that it should only apply to newly appointed category I FSPs after the commencement date of the board notice.

It is envisaged that Category II, IIA or III providers will have to provide for a minimum cover of R5 million under the same conditions as indicated above.

The nature of such cover also makes for interesting reading. "Suitable guarantees" could for instance apply to the IGF cover currently in place for short-term brokers who receive client funds, which means that they will not have duplicate cover and costs.

We also received a very interesting response from Ivan Down of Scottburgh who designed a product for intermediaries "...after a class action by the FSB during 2005/6 due to the areas that PI did not cover."

The product aims to cover losses of an insured’s client "...due to any fraudulent or dishonest act by a product provider that is regulated under the FAIS act. The limit provided by the product enables the fidelity to at least give part of the cost or loss back to the client. The fidelity applies where the intermediary had not been negligent or is alleged to be negligent, as it is impossible in some cases for an intermediary to limit these losses no matter what due diligences they carry out."

The matter of the extent of due diligence that an FSP has to undertake is yet another can of worms that we will discuss in the near future.