No CSLR fix effective without commensurate PI regime fix

ANALYSIS

As financial advice licensees face into an around 15% increase in their Compensation of Scheme of Last Resort (CSLR) levy and the possibility of funding a large special levy questions are being asked about their continued obligation to hold professional indemnity (PI) insurance.

Financial advice licensees are under a legislatyive/regulatory obligation to hold PI insurance but there is no clear data on how well this obligation is serving the needs of consumers who find themselves seeking redress or, indeed, the AFSLs who are obliged to pay the premiums.

The reality is that PI regime has been a headache for the financial advice sector for more than a decade because of its ongoing cost and the, at times, reluctance of insurers to cover the profession.

What is more, the Australian Financial Complaints Authority (AFCA) less than a year ago was telling a Parliamentary committee that while licensees are required by law to hold PI insurance it “is not designed to be a consumer compensation mechanism”.

The view of AFCA is important because it tapping a licensee’s PI cover is supposed to be the first port of call for paying the cost of an adverse monetary determination which might then preclude the necessity for the matter being referred to the already monetarily overwhelmed CSLR.

AFCA last year used a submission to a Senate Economics Committee committee inquiry to point out that when it comes to PI policies:

• The total funds available under the insurance contract may not cover the full award 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 firm’s PI 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 also made the point that it does not have jurisdiction over PI insurers and that 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 other words, AFCA has told the Parliament and, via it, the Government that the PI regime is significantly flawed in terms of what it achieves and how it dovetails with the CSLR.

AFCA’s argument is that the PI regime should act as “a first line of defence to pay compensation awarded in an AFCA determination where a firm has enegaged in misconduct”.

“An effective PII framework is also essential to ensuring the CSLR is truly a scheme of last resort,” it said.