INSIGHTS: PI Cover for AFS Licensees – Check your cover as not all PI policies have the same cover

November 30, 2017

Recent amendments to Regulatory Guide 126 highlight that financial service providers should regularly review their PI cover to ensure compliance with their regulatory and AFS Licence requirements.

In or about August this year, ASIC release findings following a review of professional indemnity (PI) insurance policies held by a sample of 56 small AFS licensees to determine whether they complied with the legal defence costs and fraud and dishonesty cover requirements in RG 126.

The review focused on the adequacy of cover in PI policies offered by two insurance companies to small AFS licensees and found that the exclusions in the standard terms of could create uncertainty regarding the adequacy of cover for fraud and dishonesty in some circumstances.

As a result of ASIC’s review, RG 126 has been revised to clarify that fraud cover is not required by licensees that are single person companies (one director is the company’s sole financial adviser/representative, shareholder and employee). ASIC subsequently liaised with the two insurance companies to amend their standard policy terms relating to fraud and dishonesty cover to ensure the amended terms comply with RG 126.

ASIC’s review also highlighted that:

 “AFS licensees do not appear to always fully understand their PI insurance cover as the policies are complex and their terms may be subject to different interpretations”. 

“there are also inconsistencies in the approaches AFS licensees take to document their annual review of their PI policies.”

Requirements for PI Cover

RG 126 requires the following minimum cover in applicable circumstances:

  • cover for acts of the licensee and all of its representatives (either under the policy or separately covered by a policy under which the licensee has a right of indemnity)
  • a prescribed $2 million minimum limit of indemnity not compromised by aggregation provisions or multiple excesses
  • defence costs to be covered in addition to the limit of indemnity or the indemnity limit sufficiently increased to take into account defence costs
  • at least one automatic reinstatement
  • cover for fraud and dishonesty
  • scope of cover to include EDR Schemes, claims for misrepresentations about services and claims arising from incidents that have been notified to ASIC and awards by state boards and specialist tribunals for claims against trustee companies
  • cover for legitimate switching cases where a client is being switched from a fund or product that is not on an approved product list to another fund or product that is on an approved product list
  • retroactive cover if a licensee had an immediately previous PI insurance policy

ASIC PI Insurance Checklist for AFS Licensees

In light of the observations from its review, ASIC has suggested the following checklist for AFS Licensees to apply in reviewing their PI Insurance:

  • Check the requirements of RG 126
  • Document your annual review of PI insurance needs
  • Obtain defence costs cover in addition to the minimum indemnity level
  • Check if your policy covers acts of fraud or dishonesty by directors, employees and all of your other representatives
  • Be aware of limitations and exclusions in your PI policy
  • Inform the PI insurance provider of any material changes to your advice business, such as an increase in the number of advisers or revenue
  • Remember that, while you can work with an insurance broker, you cannot rely on the broker to ensure your policy complies with RG 126. Ultimately you are responsible for obtaining PI insurance that complies with RG 126.

Not all PI policies are the same and in previous years some AFS licensees have had cyclical difficulties in some securing adequate PI cover which complies with the regulatory requirements.

We recommend that AFS licensees should regularly reassess the adequacy of their PI cover for compliance with obligations under RG 126 in addition to addressing their ongoing operational and commercial risk exposures.

For further advice, please contact our Financial Services team.


Disclaimer: This information is current as of December 2017. This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.