Financial planners have been advised to check they are covered by their licensee’s professional indemnity (PI) insurance, especially given the growing popularity of alternative investment strategies, managed investment schemes and gearing arrangements.
“PI insurers generally are concerned about things like double-gearing, managed discretionary accounts (MDA) arrangements, limited powers of attorney and authority and direct shares in portfolios, because the risk is in what basis did you recommend a client invest in those shares and how you’re going to manage them,” says Neil Macdonald, chief executive officer of AMP Financial Planners Association (AMPFPA).
“If you spoke to PI insurers, they’d say they are the big three things,” he adds.
Established in 1925, AMPFPA is a member association for financial planners working for AMP, Hillross, Charter, General Insurance and New Zealand adviser associations. Macdonald emphasises that it operates as a not-for-profit entity that is entirely separate from AMP.
One of the key services it provides to its members is the sourcing of PI insurance.
“When Financial Services Reform (FSR) came in, AMP Financial Planning (AMPFP) made a decision to have PI for the licensee, but its planners would have their own PI, so there’s effectively a scheme rather than a group policy.”
He explains that the association went to AMP and offered to put in place a group scheme for all the AMP financial planners in the association.
“The facility is available to any financial planner who is a member of the association…we have 100 per cent membership [among AMP planners],” Macdonald says.
Three PI models
Macdonald explains there are a few variations in the way PI insurance coverage can be structured between a licensee and its authorised representatives:
1. The licensee can provide the coverage to their ARs and include their premium costs in the licensee fees
2. As a subset of the above, the licensee can pass on PI premium costs separately
3. Authorised representatives can be given responsibility for organising their own PI insurance.
“AMPFP made the decision around 10 years ago, that as long as we (AMPFPA) organised an appropriate group policy and make that available to the planners, they will accept that policy,” he says.
“We know the excess and that the policy wording covers the things we need it to cover.”
Size does matter
According to Macdonald, the large scale of AMPFP gives it greater leverage in negotiating PI premiums: “The benefit for us and our members is that we’ve negotiated the policy for 900 practices and 1700 planners, we’ve got significant buying power.”
However, he acknowledges that skyrocketing PI insurance premiums have been a concern for the Australian financial planning sector in recent years.
“Minimum premiums have gone up. Four or five years ago it was probably around $4000, now the minimum is about $7000 – that would be for a small financial planning business.”
Getting left out
PI policy exclusions can also be particularly problematic for practices at the smaller end of the scale.
While the PI coverage AMPFPA has negotiated for its members covers them for “anything that has been approved by AMP, with no exclusions [in the policy]”, smaller practices are often not so lucky.
He refers to the provision of financial advice on direct shares as an example.
“That’s covered as part of our policy, without any additional premiums, but if you’re a smaller licensee, you may find either [the PI insurer] won’t cover it at all, or they might cover it, and say ‘the standard price is 1.5 percentage points, but for you it’s 2 per cent.’”
Asked whether he believes PI insurers are moving quickly enough in providing coverage for alternative areas of financial advice, Macdonald says: “This is the problem for most planners – they think they’ve got PI that covers them for everything they do, but…they only cover you for what’s in the policy.”
“If you start looking at it from a member perspective, we were concerned [about] what new products would come out, and making sure our cover was up to date.”
He explains this is something AMPFPA addressed in its last review of its PI insurance provider, which happens every three to five years. However, he stresses that though it is regularly reviewed, it doesn’t necessarily change its PI provider.
“We renewed our broker about three years ago now, but again, it was more a case of, if you’ve got a good broker, a good relationship with the underwriter …we’ve taken a long term view and we don’t ship our PI around every year.”
