InvestorDaily reported in early February that the Financial Ombudsman Service (FOS) had identified a ‘definite systemic issue’ within an unnamed dealer group.
In its most recent circular, the ombudsman said it had noticed a number of FOS disputes that all related to a single financial adviser.
After some interaction with FOS and an internal audit, the dealer group in question went ahead and “sent letters to the potentially affected clients, inviting them to lodge a claim”.
But according to Halsey Legal Services principal Mark Halsey, the unnamed dealer group in the FOS circular is treading a dangerous path.
“Many of the dealers' professional indemnity insurance policies that I have seen contain provisions that could potentially void insurance cover for the dealer if they perform [this type of] conduct,” said Mr Halsey.
Strathearn Insurance Brokers' general manager of professional services, Stephen Hughes, said that based on the wording of the FOS circular, such a practice is “particularly risky”.
“Virtually all professional indemnity insurance policies contain provisions allowing an insurance company to exclude indemnity where the insured [dealer or representative] makes voluntary admissions in terms of liability, or potential liability,” he said.
“It would be difficult to see how the dealer's letters to the potentially affected clients, inviting them to lodge a claim against the dealer, could be seen as other than falling within this type of exclusion,” said Mr Hughes.
As far as the insurance company is concerned, it could look like the dealer group had ‘manufactured’ a claim where none previously existed, he said.
“No conduct along these lines should be carried out without the prior written approval of the relevant insurance company,” said Mr Hughes.
Mr Halsey said the most obvious path for a dealer group that finds itself having to deal with a rogue planner is to talk to the insurer before taking any action.
While sending out letters to clients is rarely a good idea, financial advice firms do have obligations under section 912D of the Corporations Act 2001 to notify ASIC of a significant breach, said Mr Halsey.
There is little doubt that a ‘definite systemic breach’ as identified by FOS would constitute a significant breach, he added.
While the dealer group may be less than comfortable when it comes to involving ASIC in the issue, it is nonetheless a legal obligation, said Mr Halsey.
In addition, FOS has an obligation to notify ASIC of these types of systemic issues, he said – so there is little to be gained by failing to notify ASIC in a timely fashion.
“The second benefit of involving ASIC is that the dealer's subsequent remedial conduct would typically be under compulsion – that is, a direction from ASIC,” Mr Halsey said.
“As such, this conduct would not be construed as a voluntary admission and hence would be less likely to be a threat to the granting of insurance cover under the dealer's professional indemnity insurance policy.”
