A targeted review of professional indemnity (PI) insurance by ASIC has found that most small companies holding Australian financial services (AFS) licences had PI insurance that met regulatory requirements.
The review focused on the adequacy of cover for defence (legal) costs, and fraud and dishonesty, in the policies offered by two insurance companies to small AFS licensees.
Three of the 56 AFS licensees reviewed did not have PI insurance that complied with the defence costs requirements but following intervention, these licensees have obtained improved PI insurance, or are in the process of doing so.
ASIC has worked with the two insurance companies to help them make changes to their standard policy terms to ensure that their fraud and dishonesty cover allows insured licensees to comply with regulations.
The review highlighted that AFS licensees do not appear to always fully understand their PI insurance cover as the policies are complex and their terms may be subject to different interpretations. As well as this, there are also inconsistencies in the approaches AFS licensees take to document their annual review of their PI policies.
In light of the observations from this review, ASIC encourages all AFS licensees to:
- read RG 126 to understand the level of PI insurance you require;
- document the annual review of your PI insurance needs;
- obtain defence costs cover in addition to the minimum indemnity level;
- check if your policy covers acts of fraud or dishonesty by directors, employees and all of your other representatives;
- be aware of limitations and exclusions in your PI policy;
- inform the PI insurance provider of any material changes to your advice business, such as an increase in the number of advisers or revenue; and
- remember that, while you can work with an insurance broker, you cannot rely on the broker to ensure your policy complies with RG 126. Ultimately you are responsible for obtaining PI insurance that complies with RG 126.
You can download the Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees which sets out how ASIC will administer the compensation requirements under s912B of the Corporations Act 2001.