Should wholesale advice clients be treated differently under PI?
Any introduction of a compensation scheme of last resort should generate a thorough review of the professional indemnity (PI) insurance requirements imposed on financial planning licensees, including defining different treatment for retail and wholesale advice clients.
Suggestions of a thorough revision of the PI regime have come amid recent concerns expressed by CountPlus chief executive, Matthew Rowe about the cost and availability of PI insurance and his statement that he is “growing increasingly concerned, from an industry perspective, of the growing level of ‘junk’ Professional Indemnity insurance finding its way into the market”.
Former dealer group head, Paul Harding-Davis said that the answer might lie in actually separating wholesale and retail clients, in circumstances where wholesale clients arguably should not qualify for access to a compensation scheme of last resort.
“If you look at the level of wealth and knowledge expected of a wholesale client then it is arguable that they should not have access to a last resort compensation scheme or to the Australian Financial Complaints Authority (AFCA),” he said.
“It makes sense that wholesale clients can afford to utilise the courts system and that their financial advisers can, in turn, utilise the PI regime to deal with any remediation,” Harding-Davis said.
His comments come against the background of historic Financial Ombudsman Service (FOS) data suggesting that most unpaid determinations were owed by smaller licensees rather than the larger players.
In a recent analysis of the situation facing licensees, CountPlus’s Rowe referred to a “hardening in the PI market” and the need for annual rigorous renewal processes including face to face interviews with major underwriters in London.
“In every renewal with underwriters, we are reminded of the need for technology-enabled, real time data driven supervision and monitoring, conservative and defensible research processes, capital adequacy of the licensee and the need for robust and resourced first, second, and third lines of defence with risk management,” he said.
He said that these were all factors that made it increasingly difficult for smaller players to compete for the limited capital available in the PI market.
“I am growing increasingly concerned, from an industry perspective, of the growing level of ‘junk’ Professional Indemnity insurance finding its way into the market,” Rowe said.
Recommended for you
ASIC has shared data on its licensing activity during the 2023–24 financial year, including how many were cancelled or suspended.
Australia’s largest financial advice licensee has led adviser growth over the past week, while 15 new entrants joined the industry.
A research paper has detailed whether individuals are more or less likely to change their investment decision when the advice is generated by human or by artificial intelligence, including any gender differences.
Sydney-based financial advice firm Sherlock Wealth has announced it is now operating under its own AFSL, one week after Andrew Sherlock took over as its chief executive.
