ASIC probe uncovers gaps in PI cover
A review of professional indemnity (PI) insurance for advisers has found gaps in the cover offered.
The Australian Securities and Investments Commission (ASIC) examined how current policies stack up against Regulatory Guide 126, which sets out what cover an adviser should have.
It found a number of areas where policies do not meet the requirements.
The first area of concern is cover for defence costs. At the lower end of the coverage range – $2 million – ASIC found only 14% of 591 licensees reviewed had this.
“In addition to failing to meet our requirements, this creates the risk that the indemnity offered by a PI insurance policy will be used to cover defence costs rather than being available to claimants,” the regulator’s report says.
Another gap is in reinstatements. Regulatory Guide 126 requires at least one automatic reinstatement before a policy expires – but this is not necessary when a policy’s indemnity limit is at least twice the minimum cover required.
While most PI insurers include automatic reinstatement, ASIC found one that did not, covering 185 licensees.
With regards to fraud and dishonest conduct cover, only two of the four main PI insurers offered this, despite the Regulatory Guide 126 requirement.
ASIC is also concerned aggregation of claims into one event could exceed PI policy payouts. The regulator expects a licensee to have adequate resources to cover any gaps in such claims.
“In our view, advice licensees whose policies include an aggregation clause sub-limit, and who do not cover the potential gap by holding sufficient other financial resources, are unlikely to have adequate PI insurance,” the report says.
“While the PI insurance policies we reviewed generally allow the insurers to aggregate related claims, insurers have discretion in deciding whether to do so.”
ASIC says three of the major PI insurers had standard terms for aggregation of claims, covering 491 of the 591 licensees.
On compliance with minimum amounts of PI cover, the regulator found only three licensees fell short of the $2 million threshold.
ASIC Deputy Chairman Peter Kell says the review comes in response to licensees’ concerns about obtaining cover from a limited number of insurers.
“Advice businesses must have adequate PI insurance, and they should make sure this cover measures up with our requirements in Regulatory Guide 126,” he said.
“ASIC will follow up with surveillance of advice licensees’ PI insurance, and if we find problems we will take enforcement action.”
http://download.asic.gov.au/media/1240688/rg126-20dec2010.pdf
Document history
This version was issued on 20 December 2010 and is based on legislation and regulations as at 20 December 2010.
Note: A correction was made in September 2012, re-inserting RG 126.12(a), which had been inadvertently omitted.
Previous versions:
Superseded Regulatory Guide 126, issued 27 November 2007, reissued 28 March 2008 and 26 October 2009
http://www.iknow.cch.com.au/#!/document/atagUio1971828sl334519407/regulatory-guide-126-compensation-and-insurance-arrangements-for-afs-licensees
Licensees with specific PI insurance requirements
RG 126.12. The following groups of licensees are subject to specific PI insurance requirements as a condition of their AFS licence:
- (a) investor directed portfolio service (IDPS) operators: see Regulatory Guide 148 Investor directed portfolio services (RG 148) at RG 148.27; and
- (b) managed discretionary account (MDA) service operators: see Class Order [CO 04/194] Managed discretionary accounts and Regulatory Guide 179 Managed discretionary account services (RG 179) at RG 179.59.
If you fall within either of these groups, you will need to ensure that the cover you hold meets these specific requirements.
http://download.asic.gov.au/media/1240778/rg148-published-28-june-2013.pdf
Exemptions for certain persons
RG 148.27 We also provide an exemption under [CO 13/763] for persons who are involved in operating or promoting an IDPS. These persons are exempt from:
(a) Ch 5C;
(b) the requirements of Pts 6D.2 and 6D.3 applying to offers of equitable interests in securities acquired through the platform;
(c) the financial product disclosure provisions and other provisions relating to the issue, sale and purchase of financial products in Pt 7.9; and
(d) the hawking provisions in Div 8 of Pt 7.8 relating to interests in the managed investment scheme constituted by the IDPS, and relating to financial products consisting of beneficial interests in managed investment schemes that are financial products acquired th