AFCA laments lack of visibility on PI cover
The Australian Financial Complaints Authority (AFCA) has canvassed having greater visibility of the professional indemnity (PI) insurance of member companies pointing out that it does not currently have jurisdiction in respect of PI insurers.
What is more, AFCA has signalled the desirability of being able “to pursue parties beyond the “corporate veil” of administration or liquidation.
At the same time as telling the Senate Economics References Committee of the unprecedent level of complaints generated by the collapse of Dixon Advisory, AFCA made clear that while financial services licensees are required by law to hold PI insurance it “is not designed to be a consumer compensation mechanism”.
It is noted that: • the total funds available under the insurance contract may not cover the full award of compensation;
- the insurance contract may not cover the conduct which is the subject of the award of compensation; the amount of compensation awarded may be below the excess under the insurance policy
- complainants cannot make a claim directly on a financial firm’s PII policy, receive no information about why a firm’s claim might be refused and have no standing to challenge any claim refusal, and
- claims about a financial service might be made several years after the service is provided and a firm’s policy may have expired by then in circumstances where ‘run-off’ cover was unavailable or prohibitively expensive.
“AFCA does not have jurisdiction in respect of professional indemnity insurers,” it said. “Once AFCA issues a determination, the financial firm then has 30 days to pay the findings of the determination, from which point AFCA has limited visibility of what the financial firm does.”
“In many cases we would suggest that the compensation is paid out of the financial firms operating account, however some cases they may make a claim to their insurer, depending on the level of cover that they have and what the cover is for.
“Anecdotally we understand that every insurance policy could be different (in terms of level of cover, excess etc) and suspect that in some cases there are members of ours who are paying that claim through their insurer.
“If a consumer comes back to us to advise the financial firm has not complied with the determination, AFCA will proceed to report that to ASIC,” AFCA said.
It said that “PII is the first line of defence to pay compensation awarded in an AFCA determination where a firm has engaged in misconduct”.
“An effective PII framework is also essential to ensuring the CSLR is truly a scheme of last resort,” it said.
Under current settings, AFCA may receive complaints about financial advice given by a particular firm, but AFCA lacks any information about whether:
- an advice licensee has a compliant PII policy in place16
- a policy may have specific exclusions relevant to AFCA’s assessment of a complaint (such as an exclusion for advice about related party products)
- a claim or claims have previously been notified or paid by the insurer • a coverage limit has been reached or exceeded.
When applying for an AFSL it’s necessary to demonstrate adequate financial resources and appropriate PI cover to ASIC. AFSL holders also need to be independently audited each year in relation to net assets and cashflow reserves, with an auditors report (FS71) submitted to ASIC. It’s surprising this annual audit process doesn’t require a check for continued PI cover.
Our auditor checks our PI every year as part of the audit, and has done for the 20 years we have been in business. Auditors now, by law, conduct quarterly continuous monitoring. Our accountant also checks PI CoC every year and requires proof that it was paid. Sadly, they also check that we have our AFCA “membership” (making it sound like we have a choice), and that it has also been paid. This is yet another incredible overreach of AFCA. They will only be happy when every small to medium FSP is out of business from the incredible costs of compliance and administration in the current environment.
Yes, but compliance audits are voluntary, and are conducted by compliance consultants according to their own internally designed processes. FS71 audits are compulsory, strictly defined, and can only be conducted by ASIC registered auditors. They are relatively limited in scope however and do not include a PI check.
Those AFSL’s who do all the right things in their voluntary audits, are not the ones likely to end up with unpaid AFCA determinations. The AFSLs who do the right thing are the ones who end up paying the unpaid AFCA determinations, via CSLR.
Increasing the scope of compulsory FS71 audits to include a PI check, may help to reduce the number of unpaid AFCA determinations.
Who needs PI ?
Who cares about investment risk ?
The whole system has turned into an Adviser funded pay compensation for anything, at any time model.
It cannot last
It cannot continue
The whole system is broken and all ASIC, AFCA & CSLR are doing is further reducing the already decimated Adviser industry.
What other profession are forced to fund every opportunity cost on a what for basis?
What other profession funds compo for failed products they have nothing to do with?
You are 100 percent correct. It is so demoralising. Next they will want powers to pursue you beyond the grave, or maybe pursue your children? How is it that FSP’s who do the right thing now have to pay for the mistakes of those doing the wrong thing?