Financial planners will need at least $2 million in professional indemnity (PI) insurance cover if the financial services industry accepts ASIC’s proposals.
In a paper released yesterday, ASIC has proposed that financial services licensees should take out a per claim limit at least as high as the maximum monetary limit that applies to their external dispute resolution schemes.
For licensees whose actual or expected revenue is up to $1 million, the regulator says they should take out a minimum cover of $2 million.
ASIC said this would cover 90 per cent of claims for an average licensee.
For licensees with revenue greater than $1 million, the minimum cover is recommended to be twice their revenue, up to a capped minimum of $20 million.
The monetary limit of the Financial Industry Complaints Service (FICS) is $100,000 for advice-related complaints.
However, FICS is expected to raise that amount later this year.
PI insurance for new licensees will become compulsory from January 1 2008 and for existing licensees from July 1 2008.
The controversial insurance regime stems from the Westpoint collapse, where many licensees were found to have non-existent or inadequate PI cover.
ASIC is proposing a three-tiered regime to allow licensees to take out full insurance, partial insurance, or have alternative compensation arrangements.
Examples of alternative arrangements would be institutional licensees who self-insure or industry groups that choose to set up a compensation fund supported by compulsory levies on members.
The regulator said adequate PI insurance should be the main source of financial resources to meet compensation claims but admitted cover might still fail to protect consumers.
“We need to recognise there are some practical limitations in using professional indemnity insurance for this purpose,” ASIC executive director of regulation Malcolm Rodgers said.
“The regime will not cover all consumer losses relating to financial services. For example, it is not meant to cover loss resulting from the failure of a product issuer,” Rodgers said.
The deadline for comment is September 14 2007.
