Call for Greater Transparency in Professional Indemnity Insurance
Call for Greater Transparency in Professional Indemnity Insurance
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The Australian Financial Complaints Authority (AFCA) is advocating for enhanced transparency concerning the Professional Indemnity (PI) insurance maintained by member companies, highlighting its current lack of oversight regarding PI insurers.
AFCA has expressed the need to access information that extends beyond the "corporate veil" involved in scenarios of administration or liquidation. The appeal comes amid background discussions with the Senate Economics References Committee, focusing on the surge in complaints it faced following the downfall of Dixon Advisory.
AFCA emphasized that even though financial services licensees are legally obligated to carry PI insurance, this insurance is not structured to function as a consumer compensation tool. AFCA outlined several limitations of current PI insurance, illustrating why it might not fully serve consumers seeking redress:
Available funds under the PI insurance might be insufficient to cover awarded compensation.
Insurance contracts may exclude coverage for specific actions that led to the compensation award.
The compensation amount might fall below the policy excess, leaving consumers uncompensated.
Complainants cannot directly file a claim on a firm's PI policy, lacking transparency over claim denials and unable to contest them.
Services may be claimed on years later, at which point the firm's insurance could have expired, especially when 'run-off' cover is inaccessible or costly.
The authority stated, "AFCA does not have jurisdiction concerning professional indemnity insurers," adding that once it makes a decision, the implicated financial firm has 30 days to comply with the determination, after which AFCA has limited oversight regarding the firm's actions.
"In general, it is assumed compensation payments come directly from firms' operational accounts, unless a firm manages to hedge against the risk through their insurance which varies widely," AFCA observed.
Furthermore, if a firm fails to heed an AFCA determination, consumers are advised to report this to the Australian Securities and Investments Commission (ASIC), as noted by AFCA.
Notably, AFCA considers that "PII is crucial for ensuring compensation against misconduct is served" and stresses that a solid Professional Indemnity Insurance framework is vital for upholding the Compensation Scheme of Last Resort (CSLR).
In the current regulatory landscape, AFCA is frequently uninformed about whether an advice licensee maintains a relevant PII policy with applicable clauses that would affect AFCA's evaluation of complaints, such as exclusions for certain advice forms or whether the coverage limit has already been reached.
The original insights were facilitated by article discussions from the Senate Economics References Committee and sourced from an industry report featured on Financial Planning's AFCA section.
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Term Life Insurance: A life insurance that provides a cover for a specific period of time - usually one to five years or until the insured reaches age 65 or 70.
