There exists plenty of evidence that the External Dispute Resolution regime and its interplay with PI cover is proving problematic for the financial planning industry. Mike Taylor writes that the time is right for a review.
When the Association of Financial Advisers (AFA) late last year used its submission on the terms of reference for the Government’s forthcoming Financial Systems Review to air its concerns about the External Dispute Resolution (EDR) regime, it was pointing to what amounts to a looming policy failure.
What the submission called for was: “A review of the effectiveness of the AFSL EDR framework and the interplay with the availability and affordability of professional indemnity insurance”.
Broken down to its essence, the AFA’s reference to external dispute resolution is based on the reality that the EDR regime covering the financial planning industry, when coupled with the statutory requirement for planning companies to hold professional indemnity (PI) cover, no longer works in the manner in which it was originally envisaged.
The AFA is right to suggest that the Financial Sector Review traverse the current EDR regime and its interplay with PI, because for most of the past five years there has been plenty of evidence that it is a system which has become distorted by the processes of bodies such as the Financial Ombudsman Service (FOS) and the consequent commercial judgements of the major insurers providing PI coverage.
As was reported on the front page of Money Management last week, Marsh Financial Institutions and Professional Services manager for NSW Craig Claughton was concerned that the actions of EDRs in the past few years had had an impact on the types and levels of claims being seen by professional indemnity insurers.
He said insurers were confused by the outcomes of EDRs, which appeared to be claimant-centric in many instances – a concern raised by the AFA in October last year in its submission to the review of the Financial Ombudsman Service.
What Claughton might have added is that the number of insurers prepared to service the professional indemnity market has more than halved in the years since the holding of such insurance became a statutory requirement for financial planners.
He did confirm, however, that the few insurers remaining in the market had become highly selective in choosing to whom they would grant cover – something which seemed to give a sound basis to claims that the EDRs themselves had become crucial determinants in the operation of the PI market.
There have also been suggestions from some financial planners that the attitude of the insurers providing PI had actually served to impact that the type of advice planners were prepared to provide, with the suggestion that client best interests risked being trumped by the desire to retain affordable PI cover.
While the Australian Securities and Investments Commission (ASIC) has had cause to acknowledge the decline in the number of companies prepared to provide professional indemnity cover to financial planners, it has not gone so far as to acknowledge that this represents a significant problem – something which groups like the AFA would be prepared to debate.
In the absence of the Government’s Financial Systems Review exercise, it is arguable that financial planning groups could have pushed for a Productivity Commission review of the industry and the interplay between EDR and PI and the reality that, in the superannuation sphere, such matters are handled by the fully Government-funded Superannuation Complaints Tribunal.
It is in these circumstances that the AFA and other groups within the financial planning industry can be expected to continue lobbying the Government for a review of the EDR and PI regimes in the context of the broader regulatory settings and the role and functions of the regulators, including ASIC.
When both the planners and the insurers acknowledge a problem exists, it is clearly time for the Government to help drive a solution.
