The Australian Securities and Investments Commission (‘ASIC’) has recently completed a targeted review of the Professional Indemnity (‘PI’) insurance held by small Australian Financial Services (‘AFS’) licensees. The review found that overall, the PI insurance held by most AFS licensees met the requirements of ASIC’s Regulatory Guide 126.
The focus of ASIC’s review included:
- cover for defence (legal) costs; and
- cover for fraud and dishonesty.
This review followed on from ASIC’s Report 459 (see our previous blog article) which highlighted these as particular areas of concern. ASIC reviewed the PI insurance policies held by 56 small AFS licensees to determine whether the policies met the requirements in relation to cover for defence costs and fraud and dishonesty.
Most AFS Licensees will be aware that they are required to have a minimum indemnity limit of $2 million (for small AFS licensees). Small AFS Licensees are considered to be those providers who have 20 or fewer authorised representatives and revenue from financial services provided to retail clients of $2 million or less. Larger AFS Licensees will need to have adequate cover equal to their actual or expected revenue from financial services provided to retail clients, up to a limit of $20 million.
The requirements in relation to defence costs are over and above the indemnity limit (whether that be $2 million for small AFS licensees or more for larger licensees) and cover must be in addition to this amount. ASIC’s review found that three of the 56 small licensees did not meet this requirement.
AFS Licensees should review their existing PI insurance policies to ensure defence costs are covered over and above their limit of indemnity. It is also a good opportunity to ensure the limit of indemnity is appropriate given the revenue earned from financial services provided to retail clients.
Fraud and Dishonesty
Fraud and dishonesty cover is a common exclusion from PI insurance policies and ASIC found that the policies issued by two insurance companies contained this exclusion as a standard term of the policy. Where exclusions are in the standard terms of the PI insurance policy, this can create uncertainty for AFS Licensees and can lead to the scope of cover being limited and the licensee breaching their obligations under RG126.
ASIC has issued an update to RG126 to clarify that fraud cover is not required for:
- sole traders; and
- licensees that are single person companies.
A single person company is one where the sole director is also the companies:
- only financial adviser or representative;
- the sole shareholder; and
- only employee.
Action to be taken
AFS licensees should do the following to ensure their PI insurance is adequate:
- check their policy covers defence costs over the limit of indemnity;
- check their policy covers fraud and dishonesty by directors, employees and all representatives;
- be aware of the exclusions and limitations of their policy and discuss the implication of these exclusions with their broker or PI insurance provider;
- conduct an annual review of their PI insurance needs and whether the current policy meets the needs of the business.
The obligation to hold adequate PI insurance is the responsibility of the AFS Licensee and is outsourced to an insurance broker. AFS licensees should ensure they are aware of their obligations under RG126 and review the terms of their PI insurance policy against these requirements.
If you require assistance in relation to your PI insurance obligations, please contact us.
Alicia works across both Sophie Grace Pty Ltd and Sophie Grace Legal Pty Ltd with a particular focus on compliance and legal services. She manages the licensing and compliance aspects of the business. She is responsible for AFSL and ACL applications, variations and assists the compliance team in the implementation of compliance reviews. She provides ongoing compliance support and assists with the preparation of legal advice, commercial agreements and disclosure documents.