The West Australian financial planning firm which had its Australian Financial Services License (AFSL) suspended for at least 10 weeks to allow it to secure professional indemnity (PI) insurance may represent the tip of the iceberg.
Financial planning group executives have told Money Management that PI insurance has become increasingly difficult to secure and that the West Australian firm, Ballast Financial Management, will probably not be the last to come to the notice of the regulator.
Importantly, in the context of obtaining PI cover, a director and responsible manager of Ballast, Wayne Blazejczyk, was in January banned by the Australian Securities and Investments Commission from providing financial services for five years for failing to meet best interests obligations.
The senior planning executives said obtaining PI cover was difficult but would have proved really difficult for any business regarded as having compliance issues.
“The PI market is the hardest I have ever seen, insurers are withdrawing from the market and the new underwriting requirements are extensive for this cycle,” the chief executive of CountPlus, Matthew Rowe said.
“It is all about the quality of your risk management processes, access to a balance sheet and your capital keel, systems and real time data driven supervision and monitoring,” he said. “You can’t just say you have these things, you need to prove that you have them and also that you are taking a zero tolerance approach to non-compliance.”
“The days of a tick a box renewal applications are over, insurers are rationing capital and are being selective in who they back,” Rowe said.
Other planning group executives agreed with Rowe that the already tight PI market had proved even tighter over the past 18 months, with it now not being unusual for firms to pay as much as two or three times turnover to secure PI cover.
“Some of the luckier ones with good compliance records may be paying 1.8 to 2.5 times turnover, but they are the exception rather than the rule,” he said.
Rowe said he was aware of a lot of anecdotal discussions around small and mid-sized AFSL’s not being renewed and attributed this to the simple fact there wasn’t the capital in the insurance pool willing to be deployed to underwrite financial advice risk for under-resourced players.
“We have renewed our PI with a reduced deductible and guaranteed rates for the next 18 months that give certainty to Count Financial advisers, I suspect we will be one of the few players that will achieve this outcome,” he said.