Consequences of RG 126 still to be felt

Increased Australian Securities and Investments Commission (ASIC) standards regarding professional indemnity (PI) insurance are expected to lead to higher premiums, but the full effects may not be evident for some time.

ASIC RG 126 Compensation and Insurance arrangements for Australian Financial Services (AFS) licensees, which came into force on January 1, require that licensees have a higher standard of PI insurance.

While it is expected to affect premiums, Financial Planning Association (FPA) chief executive Jo-Anne Bloch said the impact would only be seen in the coming months, as there are traditionally two periods for PI insurance renewals: March and July.

“That is usually when people seek to renew their insurance, and then they will work out whether they meet all the requirements and what it will cost to meet them,” she said.

“You can meet with all the requirements at a cost, and commercial insurers may just triple the premium,” she said.

ASIC is monitoring the effects of RG 126, Bloch said, and only ASIC will know if the insurance premiums have gone up to the extent that they are unaffordable, inappropriate or unfair.

Licensees must notify ASIC if they encounter any difficulties meeting RG 126 requirements, because they risk losing their AFS licence.

This issue aside, Bloch said there is constant pressure on PI insurance as a whole. There are various issues that are being addressed on a continuous basis, she said. The FPA has been calling for a review of the entire client compensation system.

“We have continually stated that since the PJC [Parliamentary Joint Committee] recommendations came out, we believe it is necessary to have a big briefing about how we are going to deal with retail client compensation, and that includes the Financial Ombudsman Service, PI insurance, and a possible post-event compensation scheme.”

Bloch said these issues needed to be dealt with strategically.

“Although the Financial Ombudsman Service has stabilised in terms of the way it conducts itself, the increased monetary limits have increased pressures on financial planners and their PI insurance. The difficulties in the market, RG 126 and various other things have put pressure on PI insurance. And now there is a call for a post-event compensation scheme. We need to take a step back and look at it strategically, not in a piecemeal fashion,” Bloch said.

When it comes to the challenges that are faced by individual licensees, she said they are often specific problems dependent on their situation.

“I am sure you will find some businesses whose premiums have gone down,” she said. “There are pressures on the system because of a number of different things that are happening, but it is bobbing along.”