product issuer); or a return on a financial product that has not met expectations. Compensation arrangements involving professional indemnity insurance The requirement to have arrangements in place to compensate consumers is, unless the financial services licensee is an exempt licensee, subject to the requirement that the licensee hold professional indemnity insurance cover. Exempt ‘adequate’ licensees include: a general insurance company regulated by APRA under the Insurance Act 1973; a life insurance company regulated by APRA under the Life Insurance Act 1995; and an authorised deposittaking institution regulated by APRA under the Banking Act 1959. This exemption results in a large number of EDR scheme member firms not relying on professional indemnity insurance to compensate their customers where they suffer financial loss. For those firms required to hold professional indemnity insurance, the question of whether an insurance policy is adequate depends on a number of factors, including: the amount and scope of cover; whether the terms and conditions of the cover undermine the objective of providing compensation; and whether the licensee has sufficient financial resources to enable the professional indemnity insurance policy to work in practice. In relation to having sufficient financial resources available, ASIC has observed that firms should assess what financial resources are required (to cover the excess and gaps in cover due to various exclusions) and ensure they have appropriate financial resources available. Before granting an Australian Financial Service (AFS) Licence, ASIC asks licence applicants about their professional indemnity insurance arrangements and will not grant a licence until it is satisfied that the applicant has the necessary arrangements in place. However, ASIC does not approve professional indemnity insurance arrangements, nor does it have data about the renewal of advice licensees’ professional indemnity insurance cover. The Panel notes there is currently a paucity of data about the professional indemnity insurance market, in particular, the policies held by financial services licensees and credit licensees. This raises particular challenges for the Panel. The objective underpinning the professional indemnity insurance requirement is to reduce the risk to a firm that compensation claims cannot be satisfied by the firm
product issuer); or a return on a financial product that has not met expectations. Compensation arrangements involving professional indemnity insurance The requirement to have arrangements in place to compensate consumers is, unless the financial services licensee is an exempt licensee, subject to the requirement that the licensee hold ‘adequate’ professional indemnity insurance cover. Exempt licensees include: a general insurance company regulated by APRA under the Insurance Act 1973; a life insurance company regulated by APRA under the Life Insurance Act 1995; and an authorised deposittaking institution regulated by APRA under the Banking Act 1959. This exemption results in a large number of EDR scheme member firms not relying on professional indemnity insurance to compensate their customers where they suffer financial loss. For those firms required to hold professional indemnity insurance, the question of whether an insurance policy is adequate depends on a number of factors, including: the amount and scope of cover; whether the terms and conditions of the cover undermine the objective of providing compensation; and whether the licensee has sufficient financial resources to enable the professional indemnity insurance policy to work in practice. In relation to having sufficient financial resources available, ASIC has observed that firms should assess what financial resources are required (to cover the excess and gaps in cover due to various exclusions) and ensure they have appropriate financial resources available. Before granting an Australian Financial Service (AFS) Licence, ASIC asks licence applicants about their professional indemnity insurance arrangements and will not grant a licence until it is satisfied that the applicant has the necessary arrangements in place. However, ASIC does not approve professional indemnity insurance arrangements, nor does it have data about the renewal of advice licensees’ professional indemnity insurance cover. The Panel notes there is currently a paucity of data about the professional indemnity insurance market, in particular, the policies held by financial services licensees and credit licensees. This raises particular challenges for the Panel. The objective underpinning the professional indemnity insurance requirement is to reduce the risk to a firm that compensation claims cannot be satisfied by the firm
c2017-t185463-SupplementaryIssuesPaper.docx