Viability of a true compensation scheme of last resort (CSLR) is only ensured if all Australian financial services licensees have appropriate professional indemnity insurance (PII), according to CPA Australia.
In a submission to the Sterling Income Trust inquiry, CPA Australia recommended Treasury understood a government funded thematic review of PII for the retail personal advice sector. It said the key risks included accessibility, adequacy, exclusions, and impact on capital adequacy of the licensee.
It also recommended the Australian Securities and Investments Commission (ASIC) require all licensees to submit their PII cover details as part of the existing annual compliance obligations.
CPA noted a contributing factor to the need for the CSLR was the failure of PII to respond appropriately to disputes, and this often led to awarded decisions by the complaints authority remaining unpaid.
“Accessibility and affordability of PII for the retail personal advice sector have been challenges for many years, with the impact of the Financial Services Royal Commission resulting in some PII providers exiting the market,” it said.
“The shrinking nature of available cover and associated risk premiums have resulted in many Australian Financial Services (AFS) licensees increasing their excess payable or accepting exclusions in cover to secure PII on an ongoing basis. It is also not uncommon for the approval process for PII to take three to six months.
“To ensure adequate consumer protection and the viability of a true CSLR, AFS licensees must be able to access affordable cover that is adequate for the nature of the licensee’s business and can adequately meet the potential liability for compensation claims.”
CPA said the corporate regulator only assessed if PII cover was appropriate for a licensee at the time of application or as part of a surveillance activity. This was in contrast to registered tax agents and business activity statement (BAS) agents that were required to demonstrate renewal of their registrations.
“We recommend that ASIC adopt a similar model for AFS licensees. This model would have many benefits, including:
- Ensuring that the AFS licensees continue to hold appropriate PII cover;
- Sending a signal to all participants that the regulator will be proactively regulating this obligation, motivating some non-complaint, or at risk, AFS licensees to retain appropriate cover; and
- Providing insight to the regulator on trends and issues that may be occurring in the PII market.”