Planners holding PI insurance. Is it a farce?

The Australian Securities and Investments Commission (ASIC) has made clear just how poorly it believes the Professional Indemnity Insurance (PII) regime works in protecting the interests of consumers.

The regulator has admitted PII is intended to protect licensees against business risk, not to compensate investors or financial consumers.

Answering questions on notice from Senate Estimates and around the same time as the Minister for Revenue and Financial Services, Kelly O’Dwyer flagged the Government’s views on a compensation scheme of last resort, ASIC declared that while it was compulsory for financial planners and others to hold PII, it believed the regime was inadequate.

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“ASIC and others including industry associations, FOS and consumer groups have raised the shortcomings of PII as a compensation and consumer protection mechanism in a number of government inquiries and reviews including the [Financial System Inquiry] FSI,” the regulator told the Senate.

“PII is designed to protect licensees against business risk, not to provide compensation directly to investors and financial consumers. It is a means of reducing the risk that a licensee cannot pay claims because of insufficient financial resources, but has some significant limitations, including where there are insolvency issues or multiple claims against a single licensee,” ASIC said.

“Also, insurers who provide PII cover operate on a commercial basis, giving rise to issues including practical availability.”

“ASIC does not ‘approve’ PII arrangements and does not require evidence of annual or other periodic renewal of PII cover. We do, however consider AFS licence applicants' PII arrangements (at the time of the license application), conduct surveillance on licensees as risk warrants, and maintain a dialogue with stakeholders regarding any issues that might give rise to regulatory risk that licensees may not hold adequate PII

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Very disappointing from ASIC - it is drawing meaningless distinctions about what PI insurance is for - moreover its admission that it does not require evidence of renewal of annual or periodic insurance cover is disturbing. The law on this issue is clear - if ASIC took aggressive regulatory action against any person who did not have adequate PI insurance cover in place - the level of compliance with the law would improve very quickly.

PI insurance was never about compensation for every client who has a grievance against an adviser or suffers from convenient amnesia when things go wrong in investment markets.

Clearly the advisers need to polish up their crystal balls when providing advice.
The compensation side of things for clients is up to FOS or private legal action for matters of incompetence or misrepresentation by advisers.
It seems to some of us that, it would be better to put clients into Term Deposits, provide limited advice and then let the clients who perceive that all risks should be borne by the adviser when investments don't deliver the expected short term investment outcomes that client's expected or wanted.
Clients generally want an investment with no risk, no tax and an annual return of 10.0%.
Sounds reasonable to me .... what do you think?

Totally correct. PI is there to protect the legal liability of the insured party.
And whilst we're on the subject, what is the definition of a consumer because the EDR goes way beyond the original intent of the scheme and FOS want to extend it further. If they had their way, it would all come under their jurisdiction and would be a no fault compensation scheme
If the government want a no fault compensation scheme then let them fund it. Good luck with that. Every punter will claim when their investment goes down a fraction.

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