ASIC has toughened its stance on professional indemnity (PI) insurance and plans to force financial advisers to take out cover for conduct that is currently uninsurable.
Following a two-year transition period from January 1, 2008, licensees are likely to need cover for products not on their approved product lists.
ASIC said this was a key area of potential retail client loss.
They will also need to have a minimum one year’s run-off cover to maximise the potential of the compensation requirements, the regulator stated in a series of proposals released yesterday.
“If such policies are not reasonably commercially available, we expect licensees to set aside sufficient financial resources to cover this risk,” it said.
Common exclusions from PI policies include run off cover, fidelity, the non-disclosure of commissions, fraud by the principal and claims arising out of the use of non-approved products.
Under the new rules, licensees with total revenue of $2 million or less will need to have cover for an aggregate claim limit of at least $2 million.
For larger licensees, minimum cover will need to be approximately equal to actual or expected revenue from retail clients up to a capped minimum of $20 million.
FPA principal members are required to have a minimum $1 million in PI cover per individual claim or $2 million aggregate.
The crackdown on PI is a result of the collapse of the Westpoint empire in 2005, which left thousands of consumers unable to recoup investment losses due to wide insurance policy exemptions.
It will be compulsory for licensees to have PI insurance from January 1, 2008.
An ASIC-commissioned report last year found that only about 60 per cent of licensees held PI.
As its annual national conference gets underway today, the FPA said it welcomed the new rules and said it would have a solution in place in early 2008.
“The extension of the transition period to two years will greatly assist financial planners in sourcing appropriate professional indemnity cover,” FPA chief executive Jo-Anne Bloch said.
