ASIC released a revised version of Regulatory Guide 126 on 28 March 2008 in an attempt to clarify several areas of confusion that arose during the practical implementation of RG 126, following its release in November 2007 (outlined in our December 2007 Newsflash). Although not significantly different to the Initial Guide, the Revised Guide takes us one step closer to bridging the gap between RG 126 in print and its practical application. We have highlighted the key changes introduced in the Revised Guide, however, please refer to the attached Summary Table for an overview of the requirements of RG 126.Cover
The broad scope of cover required in the Initial Guide in relation to the breach of obligations under Chapter 7 of the Corporations Act has caused significant concern to Financial Planners given that the insurance industry is currently not willing to provide cover for the full scope of Chapter 7. Unfortunately, although the Revised Guide states that cover is required for conduct that amounts to ‘a breach of Chapter 7 and gives rise to liability to retail clients’, it does not limit the scope of cover within Chapter 7 as the industry had hoped it would.
The following examples of sections of Chapter 7 under which a licensee may have liability to retail clients have been included: s953B&C and 1022B&C (Civil action for loss/damage in relation to disclosure statements), s991A (Financial services licensee not to engage in unconscionable conduct) and 1041I (Civil action for loss or damage for false or misleading statements; inducing persons to deal; dishonest conduct; and misleading or deceptive conduct (civil only).
The Policy ‘must indemnify the licensee against loss or damage suffered by retail clients because of breaches of Chapter 7 by the licensee or its representatives’.
The Revised Guide specifically states that cover is required for the following:
1. liability for fraud or dishonesty by directors, employees and other representatives of the licensee; and
2. liability under EDR Scheme Awards. Note: the Revised Guide provides that a Policy will not be inadequate merely because it contains a lower sub-limit than that for which an award may be made.
Furthermore, the Policy must be a PII Policy, thus covering negligence, fraud and other misconduct (relating to retail clients), ordinarily covered by a PII Policy. Amount of Cover.
It is now clear that where the total revenue from financial services provided to retail clients is:
* less than or equal to $2 million, the minimum limit of cover required is $2 million any one claim and in the aggregate; and
* more than $2 million, the minimum limit of cover required is equal to the actual or expected revenue from retail clients, up to a maximum limit of $20m.
When determining your total revenue from financial services provided to retail clients, you must include all such revenue received by your authorised representatives.
Where the Policy also covers claims made by wholesale clients or claims that fall outside the scope of s912B, you require a higher limit of indemnity to ensure that there is adequate cover for claims that fall within s912B.
Policy Exclusions That May Not Be Included
The Revised Guide refers to the same exclusions as those listed in the Initial Guide, however provides that the Policy must not have the effect of excluding cover for these claims. This means that, although not listed as a policy exclusion, cover for such claims may not be excluded elsewhere in the Policy.
Claims arising from incidents notified to ASIC (e.g. breach register) still must not be excluded, however a Policy may include a term prohibiting admission of liability, provided it does not prevent the licensee from reporting breaches to ASIC.
Persons Covered
The Policy must cover acts of licensees and all their representatives, unless such acts are adequately covered by the representatives’ own PII and the licensee has a contractual right to be indemnified by the representatives. This means that the licensee is no longer obligated to include cover for all of its representatives.
Automatic Reinstatements
Where the limit of indemnity is at least twice the required minimum limit, an automatic reinstatement is no longer required.
Retroactive Cover
Where PII is already held, the retroactive date must be the earlier of:
· the retroactive date specified in the expiring policy; or
· the commencement date of the first PII Policy in the series of continuous policies.
Financial Resources
Although this requirement has been renamed ‘Excess/Deductibles’ in the Revised Guide, it still requires the Licensee to have financial resources available (in addition to your PII) to sustain any excess and gaps in cover as an uninsured loss
