Professional indemnity (PI) cover is expensive and often inadequate in covering losses stemming from adviser misconduct, but in the absence of an industry-funded compensation scheme, it is the only hope many consumers have.
PI insurance cover is often the biggest business overhead for small- to medium-sized financial planning businesses.
The growing scarcity of PI providers, combined with high rates of life insurance claims and a number of expensive, high profile cases of misconduct have pushed premiums even higher.
Average premiums for a small planning business of around $150,000 in annual revenue now sit at around $10,000, according to David Withers, corporate broking director, PSC Insurance Brokers.
“You might have been able to purchase PI for between $2000 and $3000 [prior to the GFC], but it’s gone up massively in the last five years,” Withers says.
PI cover has been a legal requirement under Section 912B of the Corporations Act since 2009. ASIC Regulatory Guide 126 (RG126) requires financial services
licensees providing financial services to retail clients to have arrangements for compensating those clients for loss or damage incurred as a consequence of breaches of the Act by the licensee or its representatives.
No guarantee of compensation
However, the Act also states that PI is not a guarantee that compensation will be paid.
“The insurance is not intended to cover product failure or general investment losses, claims for loss solely as a result of the failure (insolvency) of a product issuer or where a return on a financial product has not met expectations.
“RG126 is not a fix-all, by any means. There certainly is probably a minimum requirement, but after that, it’s quite grey…it doesn’t definitively tell you what’s required, in terms of limit, deductible amount, terms of coverage.
“It makes a lot of suggestions, but it can be interpreted in a lot of different ways,” Withers says.
Jesse Vermiglio, senior lawyer, Holley Nethercote says if there are concerns about the level of cover in the marketplace, “it should be put to ASIC very quickly, because ASIC is very prescriptive.”
“In the absence of there being an insurer out there that will provide cover for a particular aspect, then they should be notified pretty quickly.”
He also agrees there is a lack of clarity.
“They say a minimum of $2 million [of PI cover], but also say that really, licensees should be considering this in light of their individual business is,” Vermiglio says.
“ASIC gives a methodology in trying to price the best amount of cover, looking at revenue, clients and authorised representatives.
“The reality is…I’m not sure how many licensees might be thinking about it in the way that ASIC identifies. My suspicion is that $2 million is the minimum requirement, and beyond that, you really need to think about what [is appropriate] for your particular business.
“The general principle is that for it to be adequate, it should cover a reasonable estimate of retail clients’ potential loss.”
More consultation needed
Withers suggests there needs to be more discussion about PI. “What’s tended to happen is that the government has taken a position, without necessarily consulting the insurance industry.
“It’s not the be all and end all, because there are ways people get around it, such as, if you go into liquidation, do you have run off cover? Not necessarily…and then there’s no more protection once that’s not being paid for,” he says.
Consumer advocacy group CHOICE has for some time been calling for a more reliable, thorough means of compensating clients that have been victims of large financial losses through adviser misconduct.
Erin Turner, campaigns manager at CHOICE, says: “PI was never designed to cover consumer loss, and it never will in totality.”
Financial Ombudsman Service
Between April and July 2015, the Financial Ombudsman Service received 405 and 355 consumer claims relating to investments and life insurance, respectively.
According to Turner, there are a few hundred disputes that remain unresolved.
She believes that given most PI insurance doesn’t cover cases of adviser fraud, this strengthens the need for an industry-funded compensation scheme of last resort.
“It’s one of the reasons other professions look at pooling loss or risk together, for example, lawyers pay annual fees towards a giant pool that can then [be used to] redress clients when something does go wrong.”
The Australian Banking Association (ABA) has indicated it doesn’t support such a scheme, arguing that it would be anti-competitive and that individual banks already have their own compensation arrangements.
“But we’ve heard mixed responses from the actual members of the ABA. Some have said they’d consider it.
“If the goal is to restore trust in financial advice, this is a simple victory that would let consumers know that when something goes wrong, that this is a profession which cleans up its own mess,” Turner says.
The issue wasn’t addressed in any detail within the Financial System Inquiry report, though Turner hopes the government may make some announcements when it delivers a response to either the FSI report or the PJC inquiry.
