Legislative intent and regulation of the laws enacted can be subject to interpretation.
This is evident with the quasi legal status of so many policy statements issued by ASIC to explain its interpretation of the law. Federal Treasury recently released a consultation paper on compensation for loss in the financial services sector.
There is a real risk financial planners could inadvertently be burdened with a requirement to obtain professional indemnity (PI) insurance to cover all possible liabilities for the provision of advice. The premiums for such cover would be astronomical.
The Government has assured the FPA this is not its intention, but it is critical for us to ensure the regulations passed into law actually reflect exactly what Treasury intends or there will be a danger of a different interpretation potentially being applied at some later date. Submissions are due by November 30 and the Government intends to bring the regulation into force on January 1, 2007.
As a matter of principle, the public has a right to be protected against shoddy or unscrupulous advice. Under section 912B of the Corporations Act 2001, financial services licensees providing a financial service to retail clients must have arrangements for compensating those persons for losses suffered due to breaches of their obligations.
This requirement was introduced in the Financial Services Reform Act in 2001 as part of wide-ranging reforms of the Corporations Act. At the time of introduction, a number of concerns were raised about making arrangements to meet liabilities where compensation payments were ordered to be paid.
The commencement of the obligations was deferred until January 1, 2007, to allow the Government to consult and finalise the details of prescribed compensation arrangements for financial services licensees.
The Treasury consultation paper explored five options. The Government’s preference is for a regulation that prescribes PI insurance as one means of complying with section 912B. There would be some principles-based requirements for the adequacy of the cover but the regulations would not prescribe in detail the type of insurance required.
This is where the problem arises and the potential for a different opinion as to what would be adequate. What is needed is an obligation to obtain the minimum PI cover that would reflect a reasoned calculation of the licensee’s likely claims.
There is no doubt there is enormous potential for financially unsophisticated consumers to misunderstand or be misled about the nature of the product or service being offered, particularly in relation to the obligations and risks attached.
One need look no further than the disaster of the Westpoint collapse earlier this year to see there is a need to ensure consumers are properly compensated if the advice was inadequate. It already seems the Financial Industry Complaints Service (FICS) will be inadequate in handling the volume and jurisdiction of complaints.
We have to comply with chapter seven of the Corporations Act, which sets out certain requirements that must be met by financial services licensees. Licensees breaching these requirements are liable to compensate retail clients for losses suffered as a consequence.
This is all well in theory, but many licensees are not always in a position to meet claims made against them out of their own resources.
This creates the possibility that retail clients may not obtain adequate payments of compensation claims where there was false and misleading action or a lack of proper disclosure. PI cover is an obvious way to ensure retail clients are protected, but it is a matter of the level of cover that is adequate that may be open to interpretation.
We can’t afford as a profession to allow our reputation to be besmirched by a lack of recourse for consumers, but we have to ensure the regulations are not so onerous as to cripple us. The ability to make full payments of successful compensation claims is an essential element for the protection of consumers and to assist in ensuring a confident and healthy financial services market.
There have been too many cases where clients have suffered losses where they are unlikely to receive compensation payments. These occurrences have involved licensees whose insurance did not provide relevant cover, no insurance existed or the assets of the business were insufficient to cover claims. These cases highlight the fact uncompensated claims have serious implications for all of our reputations and confidence in the financial services market as well as the economy.
The option that proposes a regulation that would prescribe PI insurance as one means of complying is appropriate as long as the lawyers don’t interpret this as a worst-case scenario. Although the Government intends that there would be some principles-based requirements for the adequacy of cover, the regulations would not prescribe in detail the type of insurance required.
The adequacy requirements would be linked to the licensee’s exposure to claims through external dispute resolution bodies and other relevant characteristics of the licensee’s business. The reason for the link to external dispute resolution schemes is that financial service licensees must be a member of such a scheme to be licensed, and consequently, retail clients make the majority of claims for compensation through schemes such as FICS.
Licensees would be required to summarise their PI insurance coverage in their financial services guide. Some alternative arrangements would also be acceptable, provided they are notified to and approved by ASIC. The regulations would provide that ASIC should consider adequacy requirements when examining alternative arrangements.
The major institutions, by virtue of their size and capital base, would either have the assets to meet any payout claims or they would already have some form of insurance in place. Many of these licensees are also Australian Prudential Regulation Authority (APRA) regulated and as such will be exempted from the requirements because of their size or because of the obligations already placed on them by APRA.
It is going to be critical that small to medium-sized enterprises don’t get too unduly burdened by these requirements and the way to ensure that happens is to provide a submission either direct to Treasury or in conjunction with the FPA.
