Is your professional indemnity insurance adequate? If not, you may be jeopardising your Australian Financial Services Licence (AFSL) and in turn your entire business.
ASIC recently cancelled a number of AFSLs due to inadequate professional indemnity arrangements. This is despite changes to the law that have been with us for more than a decade.
Since 2002, licensees have been required to put in place adequate compensation arrangements.
Some six years later, ASIC introduced the requirement (in RG126) to hold adequate professional indemnity insurance to comply with the AFSL compensation arrangements.
RG 126 contains a detailed framework in relation to the amount and scope of cover required. For example, RG 126 requires:
- Minimum cover of $2 million (increasing to up to $20 million if revenue exceeds $2 million)
- Cover for licensees and their representatives arising from breaches of the Corporations Act 2001 (Cth)
- Cover for fraud or dishonesty by directors, employees and other representatives of the licensee
- Cover for external dispute resolution scheme awards
- Defence costs to be ‘in addition’ to the minimum limit or the level of cover must be sufficiently increased to take into account these costs.
RG 126 also prescribes various other requirements relating to retroactivity, deductibles, reinstatements and exclusions.
After the introduction of RG 126, a number of insurers sought to develop RG 126 adequate policies (although insurers were reluctant to guarantee adequacy).
Nevertheless, compliance with the requirements remains patchy.
A recent ASIC review of AFS licensees has resulted in the cancellation of seven AFSLs. During the review, it became apparent that some licensees were unable to establish that they had the necessary insurance arrangements in place. Other licensees were required to confirm the adequacy of their insurance arrangements and some voluntarily cancelled their AFSLs as they were no longer operating financial services businesses.
The review highlights the importance of maintaining adequate professional indemnity insurance. Otherwise, the viability of a financial services business is placed in jeopardy.
In light of ASIC’s recent activity, it is timely for licensees to review their insurance arrangements to ensure they do not run a similar risk.
