Under current regulations Financial Planners are required to understand their clients’ needs and products well enough to have a ‘reasonable basis’ for recommending a particular product to a particular client [1]. Recent recommendations under the parliamentary Joint Committee on Corporations and Financial Services have suggested that “the Corporations Act be amended to explicitly include a fiduciary duty for financial advisors operating under an AFSL, requiring them to place their clients’ interests ahead of their own”[2].
However, legal experts warn that the effect of this recommendation going ahead will be two fold: it will make it substantially easier for consumers to make claims against their financial planners as it will shift the onus of proof on to the advisors themselves to defend themselves against allegations of unsuitable advice, the ‘knock on’ effect of the increase in claims will result in increases in Advisors’ insurance premium which will ultimately be passed on to the consumer[3].
The shift of the ‘onus of proof’ would result in claims being easier to make, however they would also be more difficult to defend which would also contribute to an increase in insurers’ defence costs. Under ASIC regulations introduced in July last year, financial advice groups must maintain professional indemnity insurance which provides adequate cover for both settlement and the costs and expenses incurred in defending an action. This has resulted in a premium pool of approximately $30 million between 15,000 financial planners.
Michael Gottlieb, managing director of specialist insurance broker Mega Capital, said premiums had risen about 30 per cent since September last year and the market is anticipating increases of a further 20 per cent will be forthcoming. He believes this is due to the significant increase in both the number and severity of claims which were responsible for loss ratios of well over 100 per cent.
‘Insurers’ loss ratios are well over 100 per cent, so for every dollar advisors put in, insurers’ are paying more than a dollar out in claims’.
The recent Ripoll Inquiry recognised that current professional indemnity insurance requirements were inadequate in dealing with consumer protection as under the current structure, the policies themselves are designed to protect the advisors rather than their clients.
As a possible solution to providing further consumer protection the committee recommend the government consider facilitating a statutory last-resort compensation fund for investors. This would require financial advisors to compulsorily contribute to a pool which would be then used to compensate consumers in the event of a loss. Of course, this too will place further burdens on advisers, the costs of which would be passed onto consumers.
[1] Zoe Fielding, Australian Financial Review, 25 November 2009.
[2] http://riskinfo.com.au/news/2009/11/25 accessed 1 December 2009
[3] Zoe Fielding, Australian Financial Review, 25 November 2009.
Tags: ASIC, financial advisors, financial planners, Professional Indemnity Insurance
