Author: Max Lawson
The Dubai Financial Services Authority's (DFSA's) recent prudential reforms have introduced an interesting change for Category 3C firms operating in the DIFC.
From 1 July 2026, Professional Indemnity Insurance (PII) is no longer a mandatory requirement under the Prudential — Investment, Insurance Intermediation and Banking (PIB) Rulebook for most Category 3C firms, including investment managers.1
For some firms, the change may appear to present an opportunity to reduce costs by removing PII from their insurance programme. However, while the regulatory requirement has changed, the underlying exposure has not.
The rule has changed. Liability has not.
The DFSA's decision to remove the mandatory PII requirement for Category 3C firms may be viewed by some as a reduction in regulatory burden. However, it' important to distinguish between a change in regulation and a change in risk.
While the obligation to purchase PII may no longer be prescribed, the underlying exposures associated with providing investment management and advisory services have not disappeared.
Firms continue to make decisions, provide advice and manage assets in an increasingly complex and heavily scrutinised environment, where even a well-managed business can face allegations of error, omission or professional negligence.
Firms continue to owe obligations to clients, investors, funds and regulators and remain exposed to claims arising from allegations of:
- Negligent investment decisions
- Breach of mandate
- Regulatory breaches
- Trade execution errors
- Portfolio construction failures
- Misrepresentation
- Inadequate due diligence
- Operational errors and omissions
The removal of the mandatory insurance requirement doesn't reduce the likelihood of these events occurring, nor does it diminish the costs associated with defending or settling a claim.
The legal, financial and reputational consequences remain the same as before the rule change. For many firms, the question is no longer whether PII is required by regulation, but whether they're comfortable retaining these risks on their own balance sheet.
Defence costs are often the greatest exposure
A common misconception is that PII exists solely to pay damages awarded against a firm. In reality, one of its most valuable functions is funding the defence of allegations, regardless of their merit.
Investor complaints, regulatory enquiries and civil proceedings can generate substantial legal costs long before liability is established. Even when a firm ultimately prevails, the cost of defending its position can be high, often exceeding the value of the underlying claim.
Investor expectations haven't changed
While the DFSA may no longer mandate PII, institutional investors frequently expect it. Many allocators, family offices, fund boards and consultants continue to view PII as a fundamental component of a manager's risk management framework.
During operational due diligence exercises, investors routinely ask:
- Does the manager maintain PII?
- What limit of indemnity is purchased?
- Are Directors & Officers (D&O), Crime, and Cyber insurance also maintained?
For firms seeking to attract or retain institutional capital, the absence of PII may create greater challenges than the premium saving justifies.
Insurance remains a balance sheet protection tool
The removal of the mandatory PII requirement is best viewed as a regulatory simplification rather than an indication that professional liability risks have diminished.
Professional liability disputes remain an inherent feature of the investment management industry. Claims can arise from market volatility, investment underperformance, operational errors, regulatory investigations or simple misunderstandings between managers and investors.
The key consideration is therefore no longer regulatory compliance. It's balance sheet protection. Firms choosing not to maintain PII are effectively electing to retain these risks internally and fund any associated defence costs, settlements or judgments from their own resources.
Final thoughts
The DFSA's rule change has altered the regulatory landscape, but not the underlying liability faced by firms.
Investment managers today face the same operational, regulatory and litigation exposures they faced before the removal of the mandatory PII requirement. Investors continue to expect strong governance and risk management practices, and regulatory enquiries and professional liability claims remain both costly and disruptive.
The question is therefore no longer whether PII is mandatory. The real question is whether your firm's balance sheet is prepared to absorb the financial impact of a significant professional liability claim without it.
How Gallagher can help
Gallagher's Financial Lines team based in DIFC specialises in advising investment managers, fund managers and other financial services firms across the Middle East.
Through our proprietary insurance solutions and exclusive market facilities, we make it easy for firms to secure broad Professional Indemnity, Directors & Officers (D&O), Crime and Cyber insurance protection at competitive premiums, ensuring that risk transfer remains robust, proportionate and financially sound.
