FAAA Challenges Proposed Increases to Professional Indemnity Insurance Limits

Sarah Abood, CEO of the FAAA, highlighted that recent financial collapses, including those of Dixon Advisory, United Global Capital, Shield Master Fund, and First Guardian Master Fund, have predominantly resulted from product failures or systemic business model issues. She argued that enhancing the CSLR would have a more substantial impact on consumer confidence and the integrity of the financial system than merely increasing PI insurance limits.

The FAAA's submission also called for a broader distribution of compensation responsibilities beyond advice firms. It suggested that entities such as managed investment schemes, research houses, auditors, and other responsible parties should play a more significant role, especially when product failures contribute to consumer losses.

Furthermore, the association recommended amendments to the Australian Financial Complaints Authority (AFCA) rules, particularly the removal of Rule C1.5, which currently excludes complaints about the management of a scheme "as a whole." The FAAA contends that this rule has limited the ability to hold responsible entities accountable for failed schemes.

In addition to these recommendations, the FAAA urged the government to consider mandatory insurance requirements further up the financial services value chain to ensure coverage exists where risks are generated. The association also highlighted the need for more comprehensive data collection and publication by the Australian Prudential Regulation Authority (APRA) regarding the PI insurance market, including detailed information on premiums, claims, and insurer profitability.

Addressing concerns about the handling of complaints against failed advice firms, the FAAA proposed the establishment of a government-funded entity to pursue insurance claims and other recoveries on behalf of consumers and the CSLR. It also recommended preventing insurers from cancelling PI policies solely due to a firm's liquidation and requiring parent companies to maintain coverage for subsidiaries placed into administration while they remain AFCA members.

While the legal obligation to hold PI insurance rests with licensees, the FAAA noted that advisers typically bear the cost of premiums and CSLR levies. The association called for greater transparency in how licensees allocate premiums and charge for run-off cover when advisers leave a firm.

In summary, the FAAA's submission underscores the complexities involved in reforming PI insurance requirements and advocates for a holistic approach that prioritises systemic reforms over blanket increases in insurance limits.