Professional Indemnity Insurance Reviewed
After extensive consultation and investigation, ASIC have completed their targeted review of Professional Indemnity Insurance ("PII").
Their extensive review was prompted, at least in part, by REP 459 "Professional indemnity insurance market for AFS licensees providing financial product advice" dated December 2015.
ASIC's interest in PII was not purely academic. The Law requires that all AFS Licensees who provide financial services to retail clients must have adequate arrangements in place for compensating retail clients. In practice, this requires Licensees to maintain adequate PII unless an exemption applies or alternative arrangements have been approved by ASIC.
ASIC were concerned that many PII policies maintained by Licensees did not adequately address defence costs or cover fraud and dishonesty risks. ASIC were also concerned that PII policies are often complex and complicated and, as a consequence, many Licensees didn't (fully) understand the PII cover they had in place.
There are two elements to consider when your PII next comes up for renewal:
- Are 'defence costs' covered by your policy? Is it in addition to the minimum indemnity limit of $2 million? Alternatively, has your indemnity limit been sufficiently increased to take account of these costs?
- Are you covered for losses and claims that are the result of fraud and dishonesty? Are you clear how your policy defines "fraud and dishonesty", how it will be applied and what is excluded from coverage?
All licensees should be familiar with Regulatory Guide 126 but, if you are a small licensee, it's particularly important to ensure your cover satisfies ASIC's expectations and addresses the commercial realities of the market in which you operate.