Corporations Regulation 7.6.02AAA sets out the new requirements for compensation arrangements for AFS licensees providing financial services to retail clients pursuant to section 912B of the Corporations Act 2001 (Cth) (Corporations Act).
As discussed in our Superannuation Update December 2007, existing licensees must hold professional indemnity insurance cover from 1 July 2008 that:
- is adequate having regard to:
- the licensee’s membership of an external dispute resolution scheme, taking account of the maximum liability that has a realistic potential of arising in connection with any particular claim against the licensee and all claims in respect of which the licensee could be found to have liability, and
- other relevant considerations in relation to the licensee, including the volume of its business, the number and kind of its clients, the kind of business and the number of authorised representatives, or
- is approved by ASIC as an alternative arrangement.
ASIC will be administering the new requirements in a staged approach as detailed under Regulatory Guide 126 ‘Compensation and insurance arrangements for AFS licensees’:
- minimum standards as set out in Section D of the Regulatory Guide will apply to existing trustees during the initial implementation period from 1 July 2008 to 31 December 2009, and
- from 1 January 2010, all licensees will be expected to comply with the higher standards as detailed in Section C of the Regulatory Guide.
The Regulatory Guide was amended March 2008.
The superannuation industry is currently grappling with implementation of the details of the Regulatory Guide and negotiating with insurers regarding the necessary changes to insurance policies.
Freehills has been in close liaison with ASIC regarding ASIC’s interpretation of some of the more difficult practical issues arising from implementation of the Regulatory Guide. Overall, it is important to note that section 912B of the Corporations Act places the onus to establish the level of adequate professional indemnity insurance with licensees. The terms of the applicable insurance policy must be carefully reviewed in order to ensure that the cover provided is not detrimentally affected by limitations under the policy. Further, licensees must retain records of how they determined what level of cover was adequate for them.
Section D of the Regulatory Guide requires the following for professional indemnity insurance policies from 1 July 2008 (or at the latest 31 December 2008 if the policy is not up for renewal by 1 July 2008):
- the insurance must be provided by an ‘authorised insurer’ (that is, an insurer which is regulated by APRA or which operates under an exemption under the Insurance Act 1973 (Cth)). This may be a particular issue for multinational companies
- based on the ‘revenue’ of the trustee, the amount of cover under the policy must be at least $2 million for any one claim and in the aggregate. For a licensee with total revenue from financial services provided to retail clients which is greater than $2 million, minimum cover should be generally equal to actual or expected revenue (as defined in AASB 118), up to a maximum of $20 million, plus defence costs. Records should be kept as to how the licensee determined the appropriate level of cover. This concept of revenue is particularly difficult for not-for-profit trustees
- the scope of cover must include liability for loss or damage suffered by retail clients because of breaches of Chapter 7 of the Corporations Act by the licensee or its representatives, including liability for fraud and dishonesty and liability under external dispute resolution (EDR) scheme awards. Licensees should have particular regard to the scope of their existing cover for crime in reviewing the adequacy of their existing cover
- the terms and exclusions of cover must not exclude cover for EDR scheme awards, loss caused by representatives generally, fraud and dishonesty by directors, employees and other representatives or liability arising from claims notified to ASIC, and
- the deductible must be appropriate to the business and licensees must retain records of their assessment of the appropriateness of the deductible amount.
Freehills is in the process of assisting many licensees with a review of their current professional indemnity insurance policies in the light of the initial implementation requirements and liaising with ASIC regarding their interpretation of these requirements in practice.
More information
For information regarding possible implications for your business, contact a member of the Financial Services team.