Insurers are finding it difficult to provide Australian Financial Services licensees with professional indemnity (PI) insurance that meets with tough new compensation requirements set out in the Australian Securities and Investments Commission’s (ASIC’s) Regulatory Guide 126 (RG 126).
ASIC released a revised version of RG 126 on March 28, 2008, in an attempt to clarify several areas of confusion that arose during the practical implementation of RG 126 following its release.
However, despite the regulator’s efforts, Mega capital managing director Michael Gottlieb said the revised guide still does not satisfactorily address the main issues, particularly surrounding Chapter 7 of the Corporations Act.
“While we were hoping ASIC would provide clarification, they haven’t provided the level that is needed in order to assess whether these policies are compliant or not,” he said.
According to Gottlieb, the main areas of concern are around scope of cover and the exclusion rules of RG 126.
“There is no way an insurer is going to cover Chapter 7 in its entirety because it’s just too broad a chapter.
“For example, they would never cover all ‘intentional or criminal acts’. The intentional act could be things like insider trading, market manipulation and so forth, and I don’t see any insurers picking up these types of claims,” he said.
“The second major problem is around the exclusion section of RG 126, whereby you cannot have an exclusion for ‘loss caused by the conduct of representatives’. If you cannot have any exclusions, then it’s close to impossible for insurers to provide a compliant policy.”
Specialising in compliance and financial services law at Holley Nethercote Lawyers, solicitor Paul Derham said responses received on the firm’s blog had revealed similar concerns within the financial services industry.
“The problem is ASIC requiring licensees to obtain PI cover that may not even be available in the market, so you can imagine their frustration.”
According to Derham, the only option for licensees at this stage other than obtaining compliant PI insurance is alternate remuneration.
“Obtaining this, however, can be quite difficult. ASIC requires an expert’s report to be submitted with the application to assess whether the arrangement gives no less protection than PI. As you can imagine, getting an actuary in is pretty onerous,” Derham said.
“So a solution may be to offer a broader way to apply for alternate compensation, but at the moment it’s just so narrow that it’s as hard, if not harder to get than PI.
“[And] it is a double edged sword, if you make it too easy to obtain, people may forgo PI altogether.”
The Financial Planning Association has also weighed into the issue, announcing it would attempt to get a group PI policy for its members by the June 1 cut off date.
