The degree to which small financial planning businesses are getting a raw deal because of their legal obligation to hold professional indemnity (PI) insurance has been fully revealed by the Financial Planning Association (FPA) which has pointed to excessive premiums, inconsistent policy language and poor conduct by both insurers and brokers.
In a submission filed with the Australian Small Business and Family Enterprise Ombudsman’s Insurance Inquiry, the FPA has laid bare just how problematic the legal requirement to hold PI insurance has become for financial planning practices, both large and small.
It said that the PI regime had been built to suit large licensees at a time when the major banks were active in the financial planning space.
The submission has detailed the problems as including:
- High premiums
- Lack of market competition as insurers exit the Australian market
- Exclusions
- Increasing excesses
- Claims experience and expenses
- Licensees excluding PI cover from standard licensee fees and charging it as a separate cost or requiring financial planning practices to secure their own PI cover.
And among some of the most worrying issues raised by the FPA is the that insurers have placed pressure on small financial planning practices to agree to policy changes and pricing without giving them sufficient time to adequate time to “truly understand the policy given the complexity of the wording and definitions and the need to ensure exclusions do not put the business at risk of inadequate cover”.
It said that there are significant limitations in using professional indemnity insurance as a consumer compensation mechanism, including:
- The total funds available under a policy may not cover all of the compensation awarded against the insured;
- The policy may not cover the conduct which gave rise to the order for compensation – for example, if the advice recommended a product that was excluded under the policy wording even if the advice and product recommendation was in the best interest of the client as required under s961B of the Corporations Act and the legislated Financial Planner and Financial Adviser Code of Ethics;
- The complex policy wording can lead to financial planning firms holding inaccurate expectations of cover being adequate for the risks of their business and the requirements in RG126, leading to claims being denied;
- The involvement of insurer’s lawyers in the claims process can make it too costly and time consuming to pursue legitimate claims, particularly by small financial planning firms;
- The amount of compensation payable may be less than the policy’s excess; and
- The claim is outside the terms of the cover – for example where a single claim exceeds the limit of the cover, or where a financial planning business experiences multiple claims in a single year of cover – this significantly undermines the performance of the cover and whether it is fit for purpose.
