The way professional indemnity (PI) underwriters assess a planner’s risk, added to ambiguous regulatory guidelines, means a fresh approach to product regulation and safety guidelines is required.
That is the view of deputy chief of the Financial Planning Association, Deen Sanders, who said underwriters were not reviewing a licensee’s risk correctly.
Both Sanders and Christina Kalantzis from insurance broker Alexis Compliance Risk Solutions said the Australian Securities and Investments Commission (ASIC) needed to provide better product regulation and safety guidelines and ensure that all parties to investment – including the research house, auditors and manufacturers – are taken into account.
"Instead of looking at risk, underwriters are taking a formula of revenue and approved product list and charging premiums that reflect that," Sanders said.
"They react too late to the issues of the market. Instead of considering which licensees are the better businesses to insure, every planner is punished for the bad behaviour of a few."
However, Dual Australia head of commercial financial lines Aimee Pozoglou pointed to the reasons for the uplift in premiums, saying it applied to every player in the financial planning sector.
"The recent collapses of Westpoint and Basis Capital and also the [global financial crisis] demonstrated that there was a lot of volatility in the area of financial planners and as a result there have been premium increases across the board regardless of whether they are a small dealer, mid-size or even the larger dealer groups," Pozoglou said.
"What we find, though, is that the smaller dealer groups are having a lot of difficulty bearing those costs," she added.
For Dual, it’s a matter of selecting its clients as opposed to imposing pricing increases, according to Pozoglou. Further, PI insurers must ensure a practice or a dealer group is compliant and insurable before offering their products.
A spokesperson from ASIC said regulatory guide 126 outlines the policy for administering PI insurance to licensees, and Minter Ellison’s Chern Tan believes underwriters are meeting that minimum standard already.
Kalantzis believes ASIC’s guide is "subjective" and "ambiguous", and would like to see the regulatory body take into account the behaviour of research houses, auditors and manufacturers in the investment process.
"For instance, what we’re seeing is that claims being made by investors that are clearly product failures are being made under the guise of inappropriate advice, and that’s where planners get hit on those fees," she said.
Despite the limited professional indemnity cover on offer, Kalantzis said PI insurance can still be obtained, albeit at a greater cost.
"I can’t get a small to medium-sized firm a price less than $10,000. About four years ago, we could get it for $5,000," Kalantzis said.
Vero head of casualty Alex Green said while he does not see the tightening of PI insurance policies across the market, if regulations were introduced that expanded requirements on planners for broader cover, it is possible the PI insurance market would not respond as they already provided broad cover options.
According to Treasury’s consultation paper on the review of compensation arrangements for consumers of financial services, planners relied heavily on PI insurance for dispute resolution.
A last resort compensation scheme funded by licensees was also recommended under the preliminary review, but Kalantzis is not convinced it is a step in the right direction.
"We are one of the most heavily regulated industries and have more compensation arrangements than anyone else who is in the provision of giving goods and services – I don’t know why we should be coming up with other avenues," she said.
Sanders also said it was "too early" to implement a last resort scheme pending the Treasury’s review, but said affordable options for licensees would become available if regulations were improved.
