ICAEW’s proposed changes to its PII regime are designed to ensure it continues to properly protect the public and firms, while also being realistically deliverable in the commercial insurance market.
“The key reason we’re doing this is to review and update some of the rules so they reflect the modern profession and deliver the intended protection for users of accountancy services,” explains James Roberts, Chair of the PII Committee and Head of the Accountants Team at law firm Clyde and Co.
“These changes are not looking to increase the burden nor the cost, of compliance for firms,” he adds. “On the contrary, we hope it will benefit everybody if the existing rules are reviewed, evaluated and modernised.”
Striking a balance
To inform the proposals, ICAEW put out a call for evidence in April 2023 to ascertain stakeholder views on what is, and isn't, working within the existing PII arrangements.
“We wanted to gather data to shape our review,” explains James. “And the findings showed there is nothing fundamentally broken or requiring radical change. We’ve recognised that, but we’ve also changed some of the details to simplify and clarify certain things, and make it easier to update individual rules in future.”
The call for evidence also highlighted the need to avoid changes that might significantly affect the pricing or availability of insurance. “That is hugely important,” says James. “These rules are for the benefit of the public but, if pricing and insurers’ appetite to write this cover are severely impacted, that will imperil the whole scheme, which is not in the public interest.”
Something else the call for evidence reinforced was the sheer breadth and variety of ICAEW firms. “We've got a lot of sole practitioners and then, at the other end, the very large firms,” says Sarah-Jane Owen, PII and Regulatory Manager at ICAEW.
“The PII Committee is keen to continue to recognise that diversity in its recommendations,” she emphasises. “So, for example, the sliding scale for limits of indemnity has been retained, which acknowledges that smaller firms don't necessarily need the same level of cover as larger ones.”
At the other end of the scale, the proposed changes reflect the needs of the largest firms too. For example, the PII Committee is recommending a clearer, more modern test for when firms are exempt from the requirement for their insurance to include qualifying insurance.
“We're proposing to base that test on fee income, rather than number of principals, because the core concept of 50 principals is confusing in the modern profession,” explains James.
Under the proposals, the exemption for large firms would in future apply to firms with gross fee income of over £50 million, removing the so-called ‘50 principal rule’.
- To enhance public protection and reduce the likelihood of underinsurance, the changes also include increases to the minimum limits of indemnity. These limits have not changed since 2008 and no longer offer the same level of protection in view of the rising costs of claims and inflation. The specific changes are:
- The minimum limit of indemnity should be increased, so that, generally, firms will be required to have a limit of indemnity of £2 million for any one claim, and in total.
- If a firm’s gross fee income is less than £800,000, the minimum limit of indemnity for any one claim, and in total, is equal to two and a half times its gross fee income, with a minimum of £250,000.
The planned changes also link the maximum excess (amount borne by the firm before the insurance starts paying) to a firm’s fee income, replacing the current system which permits a deductible of £30,000 multiplied by the number of principals.
In future, for those firms required to have qualifying insurance, the maximum permitted aggregate excess will be £2,500 or 3% of the firm’s fee income, whichever is higher. Firms will still be able to have a lower per claim excess if they choose to. The changes will also make clear this will be an excess rather than a deductible.
“Instead of gradually reducing the extent of the insurance as you get more principals, there will now be a fixed amount,” explains James. “And that whole amount of insurance will sit on top of the excess the firm has to bear.”
“That means more insurance would be available for users of accountancy services,” he emphasises. “And we don't expect it will increase the cost because most insurance is already sold on this basis.”
For the smallest firms at the lower levels of fee income, the changes will mean a maximum permitted aggregate excess of £2,500. “We think that’s an appropriate way of ensuring a better balance for smaller firms,” says James.
The planned new rules on excesses also mean that if a firm fails to pay a claimant any amount within the excess because of its insolvency, the insurer will be liable to remedy the default.
“We’re particularly interested in hearing views from firms and insurers about this element,” says James.
“Another example of how we’re moving protection materially forward is in the arrangements for run-off insurance,” James explains.
Currently, when a firm ceases business or is acquired and merges into another firm, the firm that is closing is required to buy two years’ run-off cover, with an obligation to use ‘best endeavours’ to extend that cover up to six years.
This generally means that to cover claims that might come in after the firm has been shut down, the firm needs to buy a new insurance product, which might not always be readily available.
“We don’t think that arrangement really reflects the protection necessary and appropriate for the public,” says James. “And it doesn’t provide a proper run-off arrangement because firms may find it difficult to buy the sort of run-off cover they need.”
To address this, the proposed changes would mean qualifying insurance should provide run-off cover for six years, which is non-cancellable by insurers.
“What we're looking to do is to bake into the insurance policy that a firm has to take six years’ run-off cover. If they cease business within that policy period, they will be covered for a premium that will be written into that policy,” says James.
Because many of the proposals in the consultation simply bring the rules in line with current market practice, ICAEW doesn’t expect much will change for most firms in terms of the process of buying PII insurance.
“These are on the whole relatively modest alterations in the detail of the terms and conditions of the insurance,” explains James. “So firms will simply need to continue, as now, to engage with their brokers to ensure they’re buying appropriate and compliant cover.”
“The main changes are really to minimum levels of insurance,” points out Sarah-Jane. “But if the increases are brought forward, we don’t think it will impact the majority of firms. The evidence we collected earlier in the year tells us that most firms already buy over and above the minimum anyway.”
“There will be a small handful of firms that might have to increase their limits,” she adds. “And it would be part of the renewal process to check with the broker whether there needs to be an increase. Each firm must assess their own circumstances, and we would encourage them to do that alongside a broker.”
The consultation is open to everyone affected by the changes. “We’re not just asking firms to respond, but their clients, their brokers, our participating insurers, consumers and consumer groups, and anyone else that has an interest,” stresses Sarah-Jane.
To encourage people to get involved in the consultation and to explain some of the proposals in more detail, ICAEW is running a drop in session on 27 November. "If you're interested in learning more, or have any questions, you can register for this at the link below,” says Sarah-Jane.
“We recognise the document is lengthy, but we don't want this to put anyone off,” she adds. “We urge people to respond to those parts that are relevant to them; there is no need to answer every question.”
“One of the issues we’re most interested in,” says James, “is the practical impact of the arrangements, and also what necessary additional protection is appropriate for firms, bearing in mind the sorts of claims being made.”
“We recognise a lot of the evidence we have is qualitative, so it would be great to hear from people with some hard, numerical data about things like pricing, availability and capacity.”
The consultation opened on 18 October and runs until 14 December 2023. Once the responses have been considered, the changes should come into effect on 1 September 2024.
“We hope the changes we’ve outlined are a step forward for public protection and work well for firms, insurers and the wider market,” says James.
“That’s why we're incredibly keen to get your responses,” he emphasises. “We think we've got some good ideas, but if you think they're not good ideas or you have some better ideas, we want to hear from you.”