It can hardly have escaped the attention of the Federal Government that one of the most significant contributors to the rising cost of financial advice is the rising cost of regulation.
And a significant component of that regulatory cost burden is the professional indemnity (PI) insurance which all financial planning licensees are obliged to carry notwithstanding the reduced number of insurers willing to cover the sector and the commensurately high cost of premiums.
The problem of PI insurance and its impact on the planning industry has been known for more than a decade and the Australian Securities and Investments Commission (ASIC) has acknowledged that there is a problem while stressing that it is not ASIC’s problem but, rather, a policy problem for the Government.
During recent hearings of the Parliamentary Joint Committee on Corporations and Financial Services, ASIC deputy chair, Karen Chester, was quick to acknowledge the regulator’s understanding that a problem exists with respect to PI, while making clear it was really a problem for Treasury rather than ASIC.
Answering questions during the committee hearing, Chester said: “… you’re also talking about whether or not there has been a market failure or whether there are policy impediments that are causing unaffordability of PI cover within that sector. So they are what I’d call capital-P policy issues, which is Treasury. We’re [ASIC] lower-case-p policy issues, and we have to be very careful that we as the regulator don’t confuse the two.
“But, by all means, when we see those things, when we see evidence of that through our consultation with business and our own data collection—although we don’t have a lot of formal data collection rights in this area—we would share that with Treasury.”
Later, in a more formal response to a question on notice, ASIC stated it was “aware of concerns relating to the availability and cost of professional indemnity insurance for various sectors including those that ASIC regulates such as financial advisers”.
“ASIC does not regulate the pricing or availability of insurance in the market. Different market sectors such as property valuers will be affected by economic conditions and market cycles which will affect their risk profile, and the consequent price and availability of insurance. These are policy matters for consideration by Government. We monitor market conditions through regular industry engagement, and we liaise with Treasury and APRA on these matters,” it said.
What ASIC might also have mentioned is that the Treasury currently has before it the task of developing legislation for the establishment of a Compensation Scheme of Last Resort and that this task might properly segue into a thorough review of the affordability, effectiveness and coverage of the current PI regime.
If the Government is sensible, it will have ensured that the Treasurer’s office has already briefed the Treasury to consider the costs entailed in the industry funding a last resort compensation scheme in the context of the difficulties already being experienced by many licensees in finding and affording PI cover.
It is in these circumstances that there is much merit in industry suggestions that PI cover be reserved for wholesale clients, while other advised clients are covered by the upcoming compensation scheme of last resort.
As Money Management has pointed out in the past, hard-pressed financial advisers cannot be expected to pay for a compensation scheme of last resort whilst also being compulsorily obliged to obtain increasingly expensive PI cover.
If ASIC can’t make any decisions then it is up to Treasury to make a capital-P policy decision on the issue.
