ASIC holds firm on PI requirements

The Australian Securities and Investments Commission (ASIC) has reinforced just how little scope it will allow financial planning firms to opt out of the need to hold appropriate professional indemnity insurance, even when clients have mostly large allocations to cash. 

ASIC’s approach was made clear in its most recent report on relief decisions in which it said it had declined an application from an Australian Financial Services licensee for relief from the requirement to have adequate compensation arrangements in the form of professional indemnity insurance under section 912B of the Corporations Act. 

ASIC said the licensee and sought the relief on the basis that it was “not commercially viable for it to hold professional indemnity insurance because it did not have many clients and the majority of those clients were invested in cash”. 

The regulator said that after considering the information provided by the licensee and the relevant regulations, “we did not consider there was a sufficient policy basis to grant relief in these circumstances”.  

“In particular, we noted that the policy underlying the requirement for all AFS licensees to have adequate professional indemnity insurance is aimed at reducing the risk of consumer losses where they would be unable to be compensated due to a licensee’s insufficient financial resources,” it said. 

“It also protects a licensee against the risk that they are unable to satisfy claims by consumers—that is, the policy is aimed at protecting both consumers and licensees alike and there was insufficient evidence provided to show that it was impossible for the applicant to obtain a professional indemnity insurance policy compliant with RG 126,” the ASIC decision said.