The Australian Securities and Investments Commission (ASIC) has identified gaps which many retail AFS licensees have in their PI insurance policies which are important to be addressed with your insurer in order to avoid technical breaches. ASIC released Report 459, entitled Professional indemnity Insurance Market for AFS Licensees providing Financial Product Advice (Report 459). Report 459 summarised ASIC’s view of the Professional Indemnity (PI) Insurance market for AFS licensees providing financial product advice to clients. In Report 459 an advice licensee is an AFS licensee who provides financial product advice on Tier 1 products to retail clients.
In its report, ASIC found there were five (5) major gaps between PI Insurance Cover requirements outlined in Regulatory Guide 126 (RG126) when compared to the standard policies generally available to AFS licensees. These five (5) gaps were identified as:
- Exclusion of defence costs cover did not meet minimum standards
- Reinstatement clauses did not meet minimum standards
- Fraud and dishonesty clauses did not meet minimum standards
- Significant gaps where policies aggregated claims and also applied an External Dispute Resolution (EDR) scheme sub-limit of indemnity
- A lack of claim aggregation – there was a potential lack of affordability of the total excess payable by an AFS licensee where claims were not aggregated.
The main aim of Report 459 was to help ASIC understand whether the PI Insurance available to AFS licensees is reflective of the requirements outlined in RG126.
ASIC requires that defence costs be covered in an AFS licensee’s PI Insurance policy, in addition to the minimum level of indemnity, or cover should be increased significantly to take defence costs into account. Table 4 of RG126 outlines the minimum requirements in relation to defence costs.
ASIC found that 14% of the AFS licensees reviewed as part of their research failed to meet ASIC’s minimum requirements for defence costs.
ASIC requires PI Insurance cover to have one automatic reinstatement, meaning that if an AFS licensee’s policy is exhausted prior to the end of the policy period, the limit of indemnity is reinstated for the remainder of the policy period. It is important to note that automatic reinstatement is not required where the policy’s limit is two (2) times the minimum amount of cover required to be held by the AFS licensee. Table 4 of RG126 outlines the minimum requirements in relation to automatic reinstatement.
ASIC found that most of the Insurers reviewed complied with the provisions outlined in Table 4, however one Insurer advised that only 97% met automatic reinstatement requirements. Another Insurer advised that their PI Insurance policies did not have this provision at all.
Fraud and Dishonesty
ASIC requires that PI Insurance policies do not exclude fraud and dishonesty by directors, employees and other representatives. Table 4 of RG126 outlines the minimum requirements in relation to fraud and dishonesty.
ASIC found that only fifty per cent (50%) of the Insurers reviewed met this requirement.
Aggregation of Claims – Limit of Indemnity
Policies may include a clause, which aggregates interrelated claims so they are treated as a single claim with a single limit of indemnity. The term “interrelated” is defined by each Insurer and has not been defined by ASIC.
- EDR Sub-Limit of Indemnity:
ASIC identified EDR sub-limits of indemnity as a problem when the clause is joined with an aggregation of claims clause. When claims are joined together they are given a lower limit of indemnity where the claim is also lodged through an EDR scheme. ASIC is of the view that AFS licensees with policies that include both clauses cannot cover the potential gap in indemnity and therefore have inadequate PI Insurance.
Of the four (4) Insurers reviewed, 100% had an EDR sub-limit clause and an aggregation of claims clause included in their policies.
- Misaligned definitions of claim:
ASIC identified that EDR schemes and Insurers have different definitions when defining a claim. This can be problematic for AFS licensees when determining whether complaints will be aggregated. As noted in the report, EDR schemes often apply their jurisdictional limits on claims even though the circumstances and parties involved are the same, where the insurance policy may aggregate these claims.
Aggregation of Claims – Excess Payable
ASIC found that some Insurers do not or would not aggregate claims and separate excess is required to be paid by the AFS licensee. The lack of aggregation of claims can become expensive for AFS licensees who have a number of claims made against them during the same period. Multiple excess payouts may become unaffordable. This problem should not arise if the PI Insurance policy allows for claim aggregation.
Sophie Grace recommends that all AFS licensees, especially those who provide financial product advice to retail clients on Tier 1 products, review their PI Insurance policy to ensure they are meeting all of ASIC’s requirements as outlined in RG126.
Feel free to contact us should you require further information or assistance.
Sarah works with the Compliance Team with a particular focus on compliance and legal services. Sarah also works with the Legal Team providing ongoing assistance in drafting and reviewing documentation as well as legal research. Sarah assists clients with AFSL and ACL applications, variations and also assists in the implementation of compliance reviews. She provides ongoing compliance support in the form of compliance program implementation and reviews.