The GFC and FoFA are conspiring to make covering your back against potentially career-ending negligence claims more difficult – and more expensive.
As many financial planners struggle to adapt to the post-GFC climate, regulatory changes are weighing heavily on insurers’ minds as they baulk at offering professional indemnity (PI) products to financial advisers.
Minter Ellison partner Richard Batten believes that the FoFA regulations, set to come into effect in earnest next July, are creating uncertainty among insurers.
“I suspect there’s a little bit of holding off,” Batten said of insurers’ appetite to write PI cover, which is vital in protecting advisers from bearing the full cost of defending against negligence claims,” he said.
“FoFA is creating uncertainty now because you won’t be going back into the [PI] market right now, when you’re uncertain what the liability implications of FoFA are.”
FPA policy manager Dante De Gori added that the effects of regulatory change will be an ongoing discussion.
“July 1st 2013 is D-Day for a number of reforms in Australia. Regulatory change will affect the industry and just how is going to become more prevalent with time,” he said.
“From a membership perspective, we’re starting to have conversations with insurance providers and it’s starting to raise some alarm bells.”
According to De Gori, the GFC gave rise to a spike in claims from clients, which has fuelled the current PI standoff.
“Consumers’ complaints about financial losses during the GFC have added a lot of pressure. More complaints; more market volatility; more PI insurance price rises; more pressure.
“Consumers need to be protected from breaches of negligence by all professionals in the value chain, including financial planners, accountants, product manufacturers, directors, auditors, fund managers etc.. Trio is a case in point; Trio was a clear case of fraud and was not about inappropriate financial advice.
“PI Insurance, however, isn’t there to protect those who take investment risk. Let’s make that clear.”
In the wake of the higher PI insurance premiums incurred following the high-profile collapses of Storm Financial, Opes Prime and Trio Capital, De Gori now questions whether the GFC is to be held accountable for the umbrella approach to how finances are now being held.
“The availability of PI coverage has now become a supply/demand issue and is limited to a number of providers. The financial advice space is reducing, not increasing, in terms of PI providers. Advisers looking to renew their PI cover will be keeping a close eye on their policy terms.”
De Gori says that in the wake of the GFC, and ahead of D-Day, it’s important that financial planners continue to provide financial advice that is in their clients’ best interests – and it is important for consumers to realise that most advisers actually do follow the best interests principle.
“Of any professional in any sector, 99.9% of them are in there to do their best for the client. It is always only a minority that causes problems for the rest,” said De Gori.