No CSLR fix effective without commensurate PI | Australian Markets

ANALYSIS

As financial advice licensees face into an round 15% increase of their Compensation of Scheme of Last Resort (CSLR) levy and the likelihood of funding a giant particular levy questions are being requested about their continued obligation to carry skilled indemnity (PI) insurance coverage.

Financial advice licensees are beneath a legislatyive/regulatory obligation to carry PI insurance coverage however there’s no clear information on how effectively this obligation is serving the wants of shoppers who discover themselves searching for redress or, certainly, the AFSLs who’re obliged to pay the premiums.

The actuality is that PI regime has been a headache for the financial advice sector for more than a decade as a result of of its ongoing value and the, at instances, reluctance of insurers to cowl the occupation.

What is more, the Australian Financial Complaints Authority (AFCA) much less than a yr in the past was telling a Parliamentary committee that whereas licensees are required by law to carry PI insurance coverage it “is not designed to be a consumer compensation mechanism”.

The view of AFCA is important as a result of it tapping a licensee’s PI cowl is meant to be the primary port of call for paying the price of an adversarial financial dedication which could then preclude the need for the matter being referred to the already monetarily overwhelmed CSLR.

AFCA final yr used a submission to a Senate Economics Committee committee inquiry to level out that relating to PI insurance policies:

• The whole funds out there beneath the insurance coverage contract could not cowl the total award compensation.
• The insurance coverage contract could not cowl the conduct which is the subject of the award of compensation.
• The quantity of compensation awarded could also be beneath the surplus beneath the insurance coverage coverage.
• Complainants can’t make a declare immediately on a firm’s PI coverage, obtain no details about why a firm’s declare is perhaps refused and have no standing to problem any declare refusal, and
• Claims about a financial service is perhaps made a number of years after the service is offered and a firm’s coverage could have expired by then in circumstances the place ‘run off’ cowl was unavailable or prohibitively costly.

AFCA additionally made the purpose that it doesn’t have jurisdiction over PI insurers and that when AFCA points a dedication, the financial firm then has 30 days to pay the findings of the dedication, from which level AFCA has restricted visibility of what the financial firm does.”

In different phrases, AFCA has advised the Parliament and, by way of it, the Government that the PI regime is considerably flawed in phrases of what it achieves and how it dovetails with the CSLR.

AFCA’s argument is that the PI regime ought to act as “a first line of defence to pay compensation awarded in an AFCA determination where a firm has enegaged in misconduct”.

“An effective PII framework is also essential to ensuring the CSLR is truly a scheme of last resort,” it stated.