Increasing costs. Declining margins.
While increasing professional indemnity costs may make you think your own AFSL is out of your reach, there are some simple ways you can counter the increase and reduce your premium.
Consolidation and fragmentation are often inevitable consequences of regulatory reform; but in the case of FOFA, there has been far less fragmentation than consolidation. Despite the clear advantages of being an independent Licensee, there has been no significant increase in AFSL applications in 2012 or 2013.
This is somewhat surprising, but many advisers explain their reluctance to become Licensees as the result of their concerns over liability, the grandfathering of conflicted remuneration and the significant cost of Professional Indemnity Insurance (PI).
While liability and the prohibition of conflicted remuneration are generally outside the control of most advisers, there are five simple things that current and prospective AFS Licensees can do to secure a better deal on their PI insurance.
1. Have written policies and procedures.
Insurers, like ASIC, emphasise the importance of having measures, processes and procedures in place to document how you will provide your services and operate your financial services business. In particular, given historic issues for our industry, your compliance framework should contain clear guidelines in relation to:
- Margin Lending and gearing advice
- Agricultural Schemes/Tax advantaged MIS
- Direct Property investments
- SMSF including the qualification criteria, minimum balances and gearing rules.
- Aged Care
- Data gathering/KYC. Ensure that these processes adequately address Privacy, Scalability and the controls you’ll have in place to prevent failures. Even if you intend to limit your advice to basic insurance and superannuation, you should clearly outline the controls you will have in place to ensure that you avoid recommending excess contributions to super.
2. Show how you will manage your Approved Products List.
You need to carefully consider your proposed APL both in terms of “size” and “complexity”. The law doesn’t prescribe either the minimum or maximum number of products that can be included on the APL, but Insurers will pragmatically look to your capacity to support and maintain the APL (as well as the processes and procedures you’ll have in place to ensure your product knowledge remains current).
Generally, smaller and simpler APLs represent a reduced insurance risk, but, your APL can include complex products if you can demonstrate your capability to manage these complex products and the potential risks they create.
If you have clear Research policies and minimum criteria for product selection, most Insurers will consider you to be a reduced risk and price you accordingly – particularly when you’re also intending to engage external Research and Compliance resources to provide independent advice.
3. Engage an external compliance expert.
Retaining an external party to provide ongoing support and to perform an independent review of your compliance program (and your representatives) is a very effective way of reassuring your Insurer. But understand that retaining the wrong provider can actually work counter to your interest. Ensure that the services you’ll obtain are adequate to provide assurance about the effectiveness of your compliance program and the likelihood that you’ll comply with the financial services laws.
Independence is key. Greg Hansen, PI Specialist with Austbrokers Countrywide, claims that “Insurers love to tick off [this] box” – particularly where the external expert can provide an independent and risk based assessment with clear metrics and analytics.
4. Highlight your fraud controls.
PWC’s 6th Global Economic Crime Survey (2012) identified the financial services sector as the “industry of choice for fraudsters” and the Insurers are similarly concerned.
If your advice business will be a decentralised model using authorised representatives (that will not be under your direct control and supervision) then your monitoring and supervision arrangements will need to emphasise the fraud controls you will have in place – such as staff screening, testing and awareness training – to minimise the risk, opportunities and incentives for Representatives’ to commit fraud.
Refining your supervision framework to increase the likelihood that fraud will be quickly identified and addressed is particularly advantageous. Adviser fraud – whether tomb-stoning, misappropriation or Ponzi schemes – has caused large losses for Licensees in recent years and a corresponding increased focus from Insurers.
5. Document your business case.
Covey recommended “starting with the end in mind” but too few applicants create a compelling business case or strategy to explain why they are applying for an AFSL or how they intend to operate.
ASIC are not the only party interested in your answer to this question and documenting it clearly and effectively will allow the Insurer to understand the real risk your business represents and give them confidence that you have clearly thought about your business and how it will operate.