Professional Indemnity Insurance for Fund Management Companies

Asian and global investors have praised Singapore’s leading position in asset and wealth management. To maintain confidence among investors and follow good regulatory guidelines, the MAS has introduced PII as a requirement for a number of FMCs. This article describes the kinds of professional indemnity insurance that are needed, who it covers and how it helps manage risks within the fund management area.

Understanding Indemnity Insurance for Fund Managers

PII provides insurance that covers claims related to mistakes, negligence, errors or omissions on the part of professionals as they offer their services. Among other things, this involves responsibilities for fund managers.

• Not handling one’s investment portfolio properly
• When a student breaks their obligation to act in the school’s interests
• Advice that leads people astray or not telling them important facts
• Blunders in following policies or administration issues

Even tiny mistakes in the strict and fiduciary-guided area of fund management can bring costly lawsuits. Having PII means money is available for lawyers and for paying any settlements related to your business.

MAS Insurance Requirement for Fund Managers: When is PII Required?

All fund management companies in Singapore do not need to get PII coverage due to rules from MAS. Fund management companies in the retail sector or managing big portfolios must, in MAS’s view, use careful risk management methods such as adequate professional indemnity insurance.

PII may be required:

• While going through the Capital Markets Services (CMS) license application.
• Depending on the size or structure of the FMC’s business, approval of a license from the FMC will be conditional.
• Through internal risk management methods chosen on a voluntary basis to keep the firm and its clients safe.

MAS’s guidelines also include PII to strengthen how such firms protect investors who may face additional risks.

Fund Management Company Insurance Requirement by Entity Type

Even though PII is not required by all FMCs, fund management company setup in Singapore may prompt MAS to require or urge PII for certain entities, depending on their structure and risk exposure.

1. Retail Licensed Fund Management Companies (Retail LFMCs)

Retail LFMCs collect and manage money from both advanced and naïve investors. From the MAS’s perspective, firms that service retail clients should have rich PII coverage to manage any possible complaints.

2. Accredited/Institutional LFMCs (A/I LFMCs)

If a PII is not required by default for a qualifying A/I LFMC, MAS may still request one for certain companies that work with many assets and countries.

3. Registered Fund Management Companies (RFMCs)

Only a small number of qualified investors are provided by RFMCs which manage up to S$250 million in funds. While PII is not required by MAS for RFMCs, adding it as a risk management measure is generally agreed to be best practice.

4. Venture Capital Fund Managers (VCFMs)

VCFMs are subject to an easier set of regulations and do no not need to gather PII. Even so, firms with major obligations to others may opt to purchase insurance without requiring a law.

Key Features of Professional Indemnity Insurance for Fund Management

If PII is suggested or required, MAS wants the policy to fulfill certain quality and quantity standards to make sure it addresses the risks of the business.

1. Minimum Coverage Amount

MAS leaves insurance coverage amounts flexible for FMCs. It requires the insurance level to reflect how big, how involved and complex the FMC’s operations are.

Usually, minimum thresholds consist of:

• Each claim may be worth up to S$1 million.
• S$2 million divided across the whole year

Meanwhile, fund managers with more clients or international customers may be set a limit of between S$5 million and S$10 million per year.

2. Scope of Coverage

For this type of company, the policy for PII should deal with:

• Failure to make the right investment decisions
• Improperly or incorrectly informing clients
• Violations of trust or legal regulations
• Expenses for defending the case involve investigation and settling the matter
• If there are losses linked to employee fraud or incorrect behavior, (they should be listed).

FMCs need to make sure the coverage includes everything specific to the risks the fund management industry faces.

3. Exclusions to Avoid

Certain excluded coverages in insurance can be a problem for fund management companies. There are a few areas that are regularly left out and you should pay attention to them:

• Exclusions for items in a contract
• Cases that include businesses related to the entity
• When protection is not offered under these conditions
• Known circumstances you can’t claim for

It’s important for FMCs to look over these exclusions with legal or insurance advisors to ensure they are protected under the terms.

PII as a Risk Management Tool for Fund Management Companies

MAS treats PII as an important building block of a well-rounded approach to managing risks. It covers the company from financial problems caused by unexpected legal obligations and shows that investor interests are prioritized.

PII provides support for an FMC’s risk framework in a number of ways.

• Avoiding Serious Losses because of Litigation: It minimizes losses that could arise during litigation.
• Shows stakeholders that the FMC is managing risks related to its everyday activities.
• Having Regulatory Readiness allows the FMC to succeed in MAS inspections and audits.
• This principle helps the firm carry on operations even while dealing with claims in court.

Evidence of Professional Indemnity Insurance in MAS Licensing

Applying for a CMS license or registration, fund management companies may be asked by MAS for certain documents.

• A written version of the PII policy or a quotation
• Identification of the insurer along with the policy’s limits
• License approval is only given after confirming the policy is in force.
• Yearly renewal papers are necessary to stay in compliance.

If a licensee does not obtain the necessary PII, MAS might tell the firm to set up an alternative fund or capital reserve to meet its obligations. This requirement is part of the broader process of how to obtain a Monetary Authority of Singapore license, ensuring that licensees are financially sound and capable of covering potential liabilities.

Best Practices for Choosing Professional Indemnity Insurance for Fund Managers

Managers of funds should treat buying professional indemnity insurance like they treat their investment strategies. Among the main steps are:

1. Work With Industry-Specific Insurers

Pick insurance companies that know the rules and requirements for handling funds in Singapore.

2. Customize the Policy

Create a policy that fits the organization’s needs.

• Cross-jurisdictional coverage
• Clicks including cyber liability or data breach coverage
• Dishonesty by workers protection
• Existence of policies that cover incidents that occur after the main term ends

3. Review Annually

FMCs need to review their coverage at least once a year, mostly when they:

• An increase in the company’s assets under management
• Growth into other parts of the market
• Adding new products or services to the funds

Consequences of Inadequate Insurance

Insufficient PII coverage can lead to problems with regulators and with a company’s reputation.

• Slower or rejected processing of licensing requests
• Fines or suspensions that governments inflict
• Losing clients’ confidence and having investors take their money out
• Businesses suffer problems when they cannot pay claims or have to handle expensive legal matters

Sometimes, MAS requires a licensee to stop their business until they have the necessary coverage.

Conclusion

Fund management companies, particularly if they manage money for retail investors, need Professional Indemnity Insurance for protection in Singapore. Even though it is not required for every FMC, MAS can suggest or insist that risk management includes a risk map.

Key Takeaways:

• PII shields fund managers from being legally sued for professional mistakes.
• Retail LFMCs are typically required to hold PII where provided by MAS and, in specific circumstances, selected A/I LFMCs might also need PII.
• Most class officials set the minimum coverage to start at S$1 million, depending on how big the company is and what it does.
• Fund managers need to choose and tailor policies accordingly to respect their risk profile.
• If PII is up to date and properly protected, investors will feel more confident, the company will run smoothly and it will comply with rules.

Any FMC preparing to do business in Singapore should consider Primary Industry Influencers as both a regulation and a useful resource.