The government will consult on professional indemnity insurance arrangements and how they can improve the sustainability Compensation Scheme of Last Resort, including by giving more powers to ASIC or the CSLR.
Treasury has released a consultation paper titled Enhancing the effectiveness of financial service professional indemnity insurance, which was flagged by Minister for Financial Services Daniel Mulino last week when he announced the FY26 CSLR special levy funding mechanism and proposals for new consumer protections.
The paper asks whether ASIC’s initial oversight of approving licensees is sufficient to ensure they have adequate cover and if the regulator collect more data from licensees to expand ongoing oversight of PI arrangements. It also asks whether the industry would be comfortable with a higher levy to meet the additional costs of this oversight.
The paper also seeks feedback on what changes could be made to enable the CSLR to more effectively recover funds from a licensee under external administration or their PII insurer.
The paper notes that the CSLR doesn’t have the ability to claim against a company’s PII policy or powers to act on behalf of the company if it is insolvent, and that PII policies typically exclude losses arising directly from a licensee entering external administration.
However, the paper notes that the CSLR has found that firms that are persistent in pursuing their PII to help with claims can deliver remediation for consumers.
The consultation paper asks whether the existing regulatory model for holding PII is sufficiently protecting consumers from risk and how it could be amended.
Several companies that have gone into liquidation or administration have left hundreds of millions of dollars’ worth of client remediation to the CSLR to cover.
This includes Dixon Advisory, which was put into voluntary administration by its formerly listed parent company E&P Financial Group; as well as United Global Capital, Brite Advisors and several licensees involved in the $1 billion Shield and First Guardian collapse.
The FY26 levy blew out the $20 million subsector cap for financial advice, with $47 million due to be raised in a special levy across the financial services.
But with the FY27 levy due to exceed the subsector cap by over $100 million, the government will again consult on the future of the scheme next year.
CSLR chief executive David Berry told Professional Planner in a statement: “We welcome the consultation and look forward to seeing how PII can play a greater part in supporting victims of misconduct”.
The issue of PI coverage levels and appropriate cover was featured in the Financial Services Council licensing green paper released earlier this year, suggesting more oversight from ASIC or the government.
But the Treasury consultation will also canvass industry views of the PII market and whether licensees are able to obtain affordable PII cover, noting that although the market tightened post-Hayne royal commission, in 2023 insurance levels returned to below 2020 levels.
The paper notes that premiums, which often range from $10,000-$20,000, can be a barrier for smaller businesses to which they might represent around 10 per cent of revenue.
Larger licensees, (at least 25 representatives or more according to the paper), can face difficulty in obtaining cover during periods when insurance supply is tight and are seen as higher risk by the insurer.
According to background information established in the paper, each year around 30,000 PII policies are written for Australian financial services and credit licenses.
Total premiums for PII in financial services are about $300 million per year, which accounts for about 10 per cent of PII premiums across all sectors in Australia and less than 1 per cent of total general insurance premiums in Australia. But the legal requirement to hold PII insurance means demand is inelastic.
The current PII market in Australia is supplied mainly by APRA-authorised and Lloyd’s underwriters, with most policies distributed via insurance brokers.
As of 31 December 2020, there were 10 APRA-authorised insurers writing PII in financial services in Australia, of the 22 APRA-authorised insurers writing PII across all sectors. Lloyd’s of London writes about 20 to 25 per cent of the financial services PII market in Australia.
The paper said that some insurers have sought to circumvent liability for small-value AFCA complaints by setting the policy excess to be at least $15,000 – higher than AFCA fees, which are in the $5000 to $12,000 range.
This is purportedly due to the perceived number of small-value complaints received by AFCA that result in a cost to the licensee that is then claimed on PII, even if found in favour of the licensee.
