Professional indemnity (PI) underwriters will in the future place sharper scrutiny on how a dealer group constructs its approved product list (APL), industry experts have said.
When renewing a dealer group's PI insurance contract, one of the main concerns for insurers was what was on a dealer group's APL, Gold Seal compliance and risk management team director Claire Wivell Plater said.
"The key issues for insurers in the past has been whether [advisers] recommend products that are not on their APL, but what I think ought to be the key issue in the future is how tight their process of putting the APL together actually is," Wivell Plater said.
"Because it's really clear that the advisers who have escaped from these failures unscathed are the ones who have worked with dealer groups that have had very tight controls on their APLs."
Underwriters would increasingly focus on how dealer groups approved their investments and how strong their investment committees were, Wivell Plater said.
"But it also goes a step further than that. The next thing is ... if we're going to have volatile markets for a few years, how exposed are planners to good investments that still go down? That's the area where I think the insurers perhaps haven't turned their minds yet," she said.
"Provided the investment on its face was suitable for the client, the mere fact that the investment declines would not mean that they're liable for the client's loss. They will be liable, though, if the investment wasn't suitable in the first place, and that's not something an investment committee can fix.
"The only person who can fix that is the adviser and the adviser's training and their professionalism in terms of making sure that the investment is actually appropriate for the client."
Underwriters were also interested in the quality of advice of the financial planner and how that advice was communicated to clients, Vero head of casualty Alex Green said.
"While many investments are inherently risky, the major issue is communicating that risk to a potential investor and making sure they understand the strategy and consequences," Green said.
"Underwriters are therefore likely to focus more on how financial planners manage their compliance and how they can demonstrate that they manage it."
As a result, Gold Seal has received increased business in the past eight months from financial planners seeking risk management advice.
"We're very busy helping planners who are more nervous about the templates that they're using and the way in which they're managing clients, and they're seeking our assurance on all sorts of aspects of their practice that perhaps they didn't in the past," Wivell Plater said.
