When it comes to professional indemnity (PI) insurance the financial planning industry has a number of contentious issues it must grapple with.
Some of these concerns have been longstanding, such as the monopoly of the industry's sole external complaints dispute resolution system, which rests under the recently formed Financial Ombudsman Scheme (FOS).
Other issues, such as a compressed underwriting market, which has currently cornered the advice industry with higher insurance premiums, have festered over the years as a result of both regulatory and market forces.
While these trends have consequently changed the PI landscape over the years, it seems this transformation is set to continue as corporate collapses and the global financial crisis will eventually take their toll in the form of an escalation in claim notifications to PI underwriters.
However, despite the onset of a hardening insurance market cycle, ASIC remains confident licensees are still able to find a minimum standard of PI cover, ASIC deputy chairman Jeremy Cooper says.
"A survey of our licensees suggest that, at the moment, most licensees who need PI insurance are able to get it and there are still a reasonable range of providers, but of course this might change as policies come up for renewal this year and we will continue to monitor this," Cooper says.
While there were more than 30 potential providers of PI insurance in the Australia 10 years ago, this number has shrivelled to only a handful of underwriters operating in the domestic arena today.
QBE's exit from the PI sector in 2006 left only five PI underwriters - Dexta, Dual, Vero, AIG and CGU - operating in the Australian market.
This limited number of domestic PI underwriters is one of the main challenges the financial planning industry faces when it comes to PI policy renewal time, according to Apex Insurance Brokers account director/branch manager Abraham Tavares.
"In the lower markets, for example, turnovers of your single principals from around $200,000 to $500,000, you'll find that Vero and Dual are generally competitive," Tavares says.
"Dexta generally quotes themselves out and so does AIG, which is generally competitive for medium to larger planners. CGU is top of the tree stuff and they won't necessarily delve down into the lower market. They would go after the big top 20."
This current reality ultimately presents an oligopolistic situation for small advice firms, Boutique Financial Planning Principles Group (BFPPG) executive member Tony Gillett says.
"For a small player you can rule out CGU, AIG and Dexta, so really it comes down to Dual or Vero for small planners that are competitive and in the marketplace," Gillett says.
Synchron director Don Trapnell agrees, noting smaller advice firms are disadvantaged during the renewal process as they do not have the bargain power of larger dealer groups to secure a reasonable PI deal.
"If you're a one man band, you're paying very serious money for PI insurance to a point where you have to really consider joining a licensee rather than run your own licence purely because of the cost of PI," Trapnell says.
"I've certainly heard horror stories of renewals being very tough to get. I was recently speaking to a fellow who held his own licence and he said that when renewal time comes he's fearful that he may not be able to continue to trade.
"We experienced a 17 per cent premium increase in September last year, but someone like him could be looking at a 150 per cent increase because he can't spread the risk between a number of advisers and he can't meet the conditions as easily as someone like our group can." Synchron's 17 per cent jump in PI premiums may seem like a hefty increase, however, he says the surge was nothing compared to the 50 per cent increase his firm experienced five years ago.
"At that time the industry was changing, the market disappeared and there were only two carriers in the whole Australian market and licensees were having to go offshore to get their PI insurance," he says.
"I know of one licensee that got PI insurance through a Manila, Philippines-based insurer that made a profit last year of $100,000. Now that would be a real worry wouldn't it? Can you imagine a claim being paid on that one?"
While the current captive market does not place downward pressure on PI premiums, FPA deputy chief executive Deen Sanders says this is one of the areas the association is working on to achieve more competitive arrangements.
As a result, the FPA introduced its Pro PI service to members in July last year.
"The Pro PI service has been designed for us to help the PI industry. It's a tripartite relationship between the FPA, the broker and the PI underwriters to help everybody in that space understand the real risks and to improve that pricing," Sanders says.
The FPA's service is not restricted to the five PI underwriters in Australia, he says.
"That's the important part of the PI puzzle here, that whilst it's true that there is a limited market of domestic underwriters, we're also actively engaged in exploring overseas markets for underwriting and we'll shortly hope to be able to widen that pool of underwriting for the benefit of our members," he says.
"But we're very encouraged by our negotiations with overseas underwriting partners and we think that will improve the market, or at least add another dimension to the market that will be of benefit to our members."
However, the FPA is hopeful domestic underwriters will continue to play the dominant role in providing good-quality PI insurance, he adds.
"They understand the arrangements that are at play here and we're working with all of them to make it happen," he says.
Seeking the PI services of an offshore insurer is only rewarding for brokers if it is based on a certain level of premiums, according to Tavares.
"There's no point in going to an overseas market if your premiums are going to be less than $5000 because we're finding that it is uneconomical to do for the smaller financial planners," he says.
"The time lag in the claims process and handling of claims could also be a bit frustrating at times."
Apex currently does not have any business booked with offshore PI insurers, he says.
"We've been able to place the planners that we have with the local markets. Overseas would only be an option if it was worth your while, and there's no point in approaching overseas markets if the local market is willing to quote on that business," he says.
The combination of the general operation of the PI insurance market and securing a PI deal with an overseas insurance player has left one particular certified financial planner, who wishes to remain anonymous, disgruntled. "Last year we actually engaged a new overseas entrant into the market and they had given an undertaking to my broker that it was all okay and they had done everything," he says.
"Our PI contract expired on a Saturday but on the Friday night my broker called me with his tail between his legs saying that the insurer had pulled out and we had not lined anything else up.
"So my big issue is that the bastards actually screw you into a corner until they actually force you to make a decision because you're going to be without cover."
PI insurers should notify potential and/or existing customers at least four weeks prior to the renewal date whether or not they are insurable and what the premium rate is, he adds.
"But they don't tell you until literally the afternoon of the renewal date; that's what they all do. It happens to us every year and I dread the whole process each year," he says.
"To make the March renewal period, we start our process in December and every year it happens literally at the eleventh hour."
Despite the fact his financial planning business has excellent processes in place, he argues this is still never recognised in premiums because PI underwriters and insurance brokers do not understand the financial planning industry.
"The brokers don't actually understand our industry, so they're only doing what they can do, but we all suffer because no one specialises in it. It's a bit like a GP doing open heart surgery; they just don't understand it," he says.
"They don't actually understand the difference between an institutionally-owned dealer group that has multiple sites, with multiple advisers and unsupervision, versus another one that is fully supervised and integrated," he says.
On the other hand, Apex is one such insurance broker that specialises in PI insurance for the advice industry.
"We're a small SME [small and medium-sized enterprise] that basically specialises in financial planners, so we can actually take the time to understand what they do and deliver that submission to the underwriter with all the relevant risk exposures," Tavares says.
However, he admits there are only a handful of insurance brokers in the Australian market that can handle this type of business at a competent level.
"You have to know the industry to be able to basically offer advice in it," he says.
"You've got to make sure your customers have SOAs [statements of advice], FSGs [financial services guides], all the relevant documentation, compliance audit reports and that they actually meet those requirements, and that you also understand the changes in ASIC regulations such as the RG126 and a couple of other things."
The current PI insurance application forms are another challenge financial planners face each year during contract renewal time.
Most PI underwriters do not have a specialised application form for financial planners, according to Gillett.
"You'll find that there is a [general] PI insurance form that is for other occupations, like engineers, accountants, financial planners, and some of the questions are just stupid. They are completely inapplicable and you can't honestly provide answers," he says.
"The PI underwriters couldn't even be bothered to have a specialised application form, and they each have their own way and 'secret women's business' of being able to assess risks. "In the whole scheme of things PI is also a very small area of business and a lot of them don't bother with it because it's too bloody hard and too risky."
Furthermore, Trapnell says the PI application forms do not differentiate between a risk-based advice firm and financial planning practice.
"Synchron is actually risk focused, so when we fill out our paperwork for our PI renewal the first thing we've got to do is get in touch with the insurer and say, 'please be aware all these questions are relating to financial planning practices and that's only 20 per cent of our business'," he says.
Despite this, Synchron does not find the PI renewal process too onerous, he adds.
"Fortunately we have a good broker, and good communication with your PI underwriter is critical," he says.
In addition, financial planners the IFA spoke to agree there needs to be a standardised industry-accepted PI application form for smaller advice practices and another for larger dealer groups in order to address the relevant issues pertaining to each.
While Sanders agrees completing a PI application form can be a complex task for an adviser, he believes it is the job of the PI broker to fully understand the different business structures operating within the advice industry.
"Certainly if any of our members are concerned about that . even if they are struggling to complete forms then we've tried to put in place a whole new level of customer service through our PI broker, Jardine Lloyd Thompson (JLT), on this where they can assist them to work those things through," he says.
"But I think what we tend to see instead is that the smaller players do have to do a lot of paperwork and fill out the same sort of material that any large institution would and that certainly takes time and . eats into their operating capacity, their profits and all sorts of things.
"Unfortunately I don't see an improvement to that substantially because underwriting risks in financial planning is becoming increasingly complex, and we want it by the way to be appropriately nuanced, we don't want a one-size-fits-all policy because that would probably be more expensive than it needs to be," he says.
The FPA wants PI underwriters to recognise the differences in the market and in individual players working in the financial planning sector and ultimately price their PI polices accordingly.
"That would be a great outcome and that's one that we're shooting for," Sanders says.
Another area of great angst for financial planners is the industry's current external dispute resolution scheme that rests with FOS, Gillett says.
"The elephant in the room when it comes to PI cover for financial planners is the monopoly position of FOS. We have no choice and no other external dispute resolution scheme that we can go through," he argues.
"Back in 2001 my firm had a complaint where the complainants of husband and wife were both public servant lawyers and they knew the system.
"As a small firm we went through hell for two-and-a-half years. We must have written hundreds of pages of stuff. It debilitated our business and I finally gave up and allowed them to win the claim.
"But if we had had the opportunity to go through the court system there was no way that would have been the outcome. So that's been my personal experience and I've never forgotten how grossly unfair it was." Consequently the BFPPG submitted a 22-page paper to the Financial Industry Complaints Service (FICS) four years ago to address these concerns.
"They did respond but it was all sort of ducking and diving and dodging and they didn't address any of the substandard issues," Gillett says.
"The biggest issue for everybody is this issue of handing over control; we just don't have the same rights to have our day in court.
"In the past there's been a very strong lack of transparency . and quite honestly some really bloody stupid decisions have been made where you shake your head and wonder who made this decision because it's bloody ridiculous."
However, under current FOS procedures, when a high-value or complex dispute involving a financial planner requires a determination, these cases are heard by a three-person panel, FOS investments, life insurance and superannuation ombudsman Alison Maynard says.
The panel is comprised of an independent chair, a consumer representative and a financial planning representative, Maynard says.
"That financial planning representative is also nominated by the industry and I can tell you that the FPA has nominated all of the people who are the industry representatives dealing with financial planning matters," she says.
However, Gillett argues the current procedures need to change to ensure more equitable outcomes for financial planners.
"What needs to happen is for FOS to follow a different set of rules and procedures in the way that it determines its cases so that they are clear, open, transparent, and for the reasons that are given there also needs to be some right of appeal," he says.
"If those issues are addressed, and we feel that we are being dealt with fairly and correctly, I think that a lot of these fears and anger would probably be resolved."
The FOS environment is certainly a challenge for the industry, Sanders says.
"We've been quite public about our concerns that PI is something that is subject to a whole range of impacts by other concerns in the marketplace, and a substantive one is the nature of complaints resolution in financial services," he says.
"It's true that a number of our members are quite vocal in that they do see the impact of false decisions and the consequences of that in overall PI premiums for the industry and that is quite concerning."
There are still open questions about the idea of retail client compensation more generally, he says.
"The assumption that the financial planning firm is a key player in that space is something that we do need to do a lot more work on in helping the government and the community understand the very complex role of PI and the fact that there are many players in the space that should be equally responsible for the way that stuff is managed," he says.
However, Maynard points out ASIC is currently reviewing RG139.
"I have no doubt that financial planners, as have all other stakeholders, had an opportunity to put their views to ASIC about what should be the guidelines for the external complaint scheme, so they do have a voice that is listened to by the regulator and by FOS," she says. FOS is also in the middle of developing new terms of reference, on which financial planners are being consulted, for the resolution of complaints from 1 January 2010, she adds.
"We're also shortly about to have in place an advisory committee to the board specifically in relation to financial planning issues, and we've already had nominations from the FPA on who should be on that committee," she says.
"So at the moment we might be the only complaints scheme that financial planners can join, but they certainly have a say in what goes on in that scheme."
FPA PI service prospers
Since the introduction of the FPA's Pro PI service to members in July last year, the association has received in excess of 50 formal applications, FPA deputy chief executive Deen Sanders says.
"From the July to December 2008 period, we received 52 submissions, which I think is a very positive result especially given that occurred through the quiet PI cycle," Sanders told IFA.
"It will start to pick up from this month as March and June are the two key months for policy renewal."
The FPA has received extraordinary feedback from members about the Pro PI service, he adds.
"It's really caught us by surprise. We've had people ring me to say that in their many years of buying PI, this is the first time they've felt like they've had somebody that understood what it meant to be a financial planner and a member of the FPA," he says.
"That kind of feedback is very heartening to hear because that was the whole point of the exercise, to help the PI industry understand what being a financial planner means and the sorts of challenges and specific needs of their business."
The FPA will shortly be kicking off a new communication campaign to coincide with the onset of this year's PI premium renewal cycle during the March-June period.
"We do intend to make that more widely known to members what's happening in the Pro PI space and we're looking forward to seeing more of them take it up," Sanders says.
"We don't have any hard and fast measures or quotas; we're really just interested in members having the opportunity to negotiate on the best terms they can and ensuring the best possible PI is available to members irrelevant of whether they have the opportunity to take it up.
"The reality is that having this service in place does put downward pressure on pricing for everybody, it creates more competition by having this in the marketplace and that's a good outcome for everybody."
