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IFA Insurance

Professional Indemnity Insurance for IFAs

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Professional Indemnity Insurance for an IFA 

Advising clients on how to secure their financial future by protecting and growing their financial assets can be very rewarding. It can also be fraught with dangers if your advice is incorrect, you make a mistake or a client suffers losses. In these situations, you may be sued for their losses or face other legal or financial issues related to your services.  

 It is very important that as an IFA you have adequate protection. As an IFA who advises others on financial matters, you would do well to take the necessary steps to protect your own interests.
If you’re concerned about the cost of this type of insurance, you may want to think about using an insurance comparison site like Quotezone.co.uk which sources quotes from a wide range of insurers. You’ll be able to compare a wide range of competitive quotes for policies designed to meet your needs. 

Is IFA insurance a legal requirement in the UK? 

Professional indemnity insurance for an IFA is a legal requirement. High-risk professions like those in the medical, financial or construction legal are usually required by law to have professional indemnity insurance in place in the UK.  

It would be very risky and foolhardy to advise people about financial matters without the protection and coverage provided by professional indemnity insurance. The cover is there to protect clients as well as the advisor.  

Regulatory bodies and organisations like the Financial Conduct Authority (FCA) require you to have indemnity insurance in place in order to conduct your regulated activities. 

Do accredited bodies like the CISI or CII insist that IFAs have this type of insurance? 

Accreditation bodies like the Chartered Institute for Securities & Investment (CISI) or the Chartered Insurance Institute (CII) will typically expect IFAs to have professional indemnity cover for an IFA.
Given that it is a legal requirement of the FCA, an IFA will need to have this cover in place in order for them to provide their regulated services. 

Is this type of policy suitable for independent IFAs, or is it only suitable for larger companies? 

IFA insurance is a legal requirement for both solo financial advisors as well as for larger companies. Both groups benefit from the same types of coverage and protection afforded by this type of insurance. 

Solo IFAs will receive personal protection against claims such as legal claims that may arise due to their advice or services. Not only does IFA insurance protect you against legal costs, but other financial impacts that could arise from a claim being lodged. 

How likely is it that an IFA might be sued by a client?  

It is always possible that at some stage in the career of an IFA, they could be sued or face some other type of lawsuit. This is precisely why IFA indemnity insurance is so important.  

Several factors contribute to the likelihood of an IFA being sued and these include: 

  • The nature and type of advice that you are providing. 
  • Communication problems with a client if their expectations are not met.
  • Ignoring industry best practices.
What risks does professional indemnity insurance for an IFA protect them against? 

Professional indemnity insurance for independent financial advisers is designed to provide coverage and protection from a myriad of risks associated with the advice and services supplied by an IFA. 

Although coverage can be broad there are generally two main categories of risks that are provided for. 

  1. The first category has to do with the services that an IFA supplies, and the advice that they offer. As an IFA you will receive coverage for professional negligence, incorrect and misleading advice and failing to act in the best interest of your client. 
  1. The second major category is the legal and financial cost protection you receive. Legal fees for defending claims, settlement costs and even assistance in regulatory investigations are covered. 
What are the typical policy exclusions of IFA insurance? 

The policy exclusions normally found in professional indemnity insurance for IFAs policies typically include: 

  • Any claims that may be a result of criminal activities like fraud.
  • Intentional acts of wrongdoing. 
  • Situations or circumstances that existed before you took out the policy as well as claims made retroactively outside the policy period.
  • Business disputes like arguments over contractual issues. 
  • Injuries to people and damage to property as these scenarios are covered by public liability insurance.  
How much does IFA indemnity insurance cost? 

The cost of indemnity cover for IFAs can vary hugely depending on a range of risk factors used by insurance companies to assess the risk posed by a particular IFA. 

Generally, the costs of IFA indemnity insurance will depend on how the following factors are applied to a specific IFA: 

  1. The coverage limits requested, with higher levels of coverage costing more, as well as other policy-related features like deductible amounts. 
  2. The individual risk profile of the IFA with the size of the business, nature and type of advice supplied important to the insurer.
  3. The level of training, qualifications and experience of the IFA are also considered. 
What risk factors will professional indemnity insurance companies use in that insurance premium calculation? 

As with most professional indemnity insurance, the details about the business as well as the IFA themselves are very important to insurance companies when they are calculating insurance premiums. 

The following factors are some of the most critical: 

  • The nature of the business and the type of service provided. 
  • Insurance-related factors like the claims history of the IFA.
  • The deductible amount opted for.
  • The coverage level required.
  • The market conditions.
  • The typical client base. 
Does an IFA’s claims history affect their premium? 

Yes, the claims history of an IFA is an important component of the insurer risk analysis and will likely affect the premium the IFA pays. 

Insurers take particular interest in the number, frequency and monetary size of the claims being made. Insurance companies consider IFAs who have a high amount of claims to be riskier to insure. 

IFAs with a history of claims can expect to pay higher rates than an IFA who has made very few or no claims. 

Does the IFA’s annual turnover affect their professional indemnity insurance premium? 

The annual turnover of an IFA is a good indicator of the size of the business as well as the scale of its operations. The higher the turnover the higher the premium is the general rule of thumb. 

These metrics are important to insurers as they give them an indication of the level of risks and different cost factors that they would be exposed to should they supply insurance coverage to a particular IFA.  

How can I reduce the cost of my IFA insurance? 

You could reduce the cost of your IFA indemnity insurance by making some of these changes to your insurance policy: 

  • Increasing your deductible 
  • Adjusting your coverage level  
  • Bundling your insurance policies 
  • Improving your qualifications 
  • A demonstrable risk management plan 

There are also more methodical ways to reduce costs such as shopping around and comparing quotes from different insurers.