Professional indemnity (PI) insurance should not be regarded as a way to fix large-scale failures in the financial advice sector and efforts should be made to identify their causes and prevent them, a cohort of industry bodies has told the government.
The push to ensure PI insurance was correctly viewed as a redress measure was made by the SMSF Association, Chartered Accountants Australia and New Zealand, CPA Australia and Institute of Public Accountants in a submission to the Treasury consultation on enhancing the effectiveness of financial services professional cover.
The joint associations stated it was critical for Australian financial services (AFS) licensees to have compensation arrangements in place to address losses suffered by clients as a result of a breach by the licensee or its representatives, and PI insurance currently filled that role.
They, however, rejected the idea PI insurance should be used as a catch-all for the wide range of problems that have recently taken place in the advice sector.
“We acknowledge that PI insurance is not designed to cover product failure or claims for loss as a result of the failure, for example, insolvency, of a product issuer, nor is it intended to underwrite the products of a product issuer,” the submission stated.
“While effective and responsive PI insurance is an important element of the financial services regime, it should not be seen as the solution to the large-scale systematic failures in the retail financial advice sector.
“The solution to these large-scale systematic failures is improving the monitoring and timely enforcement of our complex, yet robust, regulatory framework – as evidenced by the extensive regulatory actions taken by the regulator after these events have transpired.”
The four industry bodies added more work needed to be done on how the current regulatory framework can be used to prevent, detect and respond to poor conduct, conflicts of interest and fraud before they become large-scale systematic failures.
“Once we have addressed how we can reasonably prevent the harm, then we should consider how the other elements of consumer redress need to work to support those regulatory settings. This includes understanding the gaps, shortfalls and limitations of available PI insurance cover,” they added.
The joint associations recommended the mandatory reporting of PI insurance claims, including those paid, unpaid or declined, should be introduced to provide data that would show if PI insurance was effective in dealing with claims for financial losses due to poor-quality services and misconduct by an AFS’s representatives.
