ASIC releases final regulatory guide on compensation and insurance arrangements for AFS licensees
After considering responses to its consultation paper issued in July 2007 (discussed in our Financial Services Reform Update August 2007), ASIC has issued its final Regulatory Guide 126 Compensation and insurance arrangements for non-APRA regulated AFS licensees.
ASIC will require licensees to adopt a higher standard of professional indemnity (PI) insurance over a two year implementation period. This is in order to give the insurance industry time to develop insurance products that meet the higher standard.
Implementation period policy
The implementation period starts on 1 July 2008, for pre-January 2008 licensees, and starts on 1 January 2008, for new licensee applicants, and runs until 31 December 2009. During this period, AFS licensees that provide financial services to retail clients must have a PI policy that meets the following minimum requirements (amongst others):
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Amount of cover: The policy must have an aggregate claim limit of at least $2 million for licensees with annual revenue of up to $2 million, and where total annual revenue exceeds $2 million, an aggregate claim limit of annual revenue up to a capped maximum limit of $20 million;
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Scope of cover: The policy must cover breaches of Chapter 7 of the Corporations Act by both the licensee and its representatives, EDR scheme awards and fraud of representatives, employees and agents;
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Exclusions: The policy must not contain specified exclusions including, notably, claims from incidents notified to ASIC pursuant to breach reporting obligations;
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Defence costs: The policy must provide cover for defence costs that is in addition to the minimum aggregate claim limit noted above, or the level of cover must be sufficiently increased to take into account these costs (which can comprise up to 50% of total claims).
Licensees with PI insurance in place before 1 December 2007 that does not meet these minimum requirements and does not come up for renewal in sufficient time to comply by 1 July 2008 must take reasonable steps to comply as soon as possible thereafter (but no later than 31 December 2008).
Final policy
From 1 January 2010, in addition to the above minimum requirements, PI policies must also:
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cover fraud against clients by the licensee itself, except where the licensee is a sole trader; and
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provide for run-off cover for as long a period as is reasonably practicable, but at least one year.
Alternative arrangements
As envisaged in the consultation paper, licensees may apply to ASIC for approval of alternative compensation arrangements. ASIC states that it will only approve arrangements that give no less protection than adequate PI insurance. An example of an alternative arrangement is an industry compensation fund supported by compulsory levies of members.
