Professional indemnity (PI) insurance premiums are going up again and tough questions are being asked about whether small, self-licensed financial planning practices have the capital adequacy necessary to deal with the claim excesses climbing towards $100,000.
What used to cost around $25,000 a year has climbed towards close to $100,000 for some practices, and senior dealer group heads are questioning how this can be afforded by many smaller, self-licensed businesses.
The concerns about the capital adequacy of smaller, self-licensed firms and their ability to meet significantly higher PI premiums has come at the same time as the latest data has revealed that the number of single adviser licensees in Australia has risen from just 489 in 2015 to around 891 in December, 2018.
At the same time, the number of firms with two to five advisers has grown from 619 to 846 over the same period.
CountPlus chief executive, Matthew Rowe has confirmed to Money Management that he is currently in the market for PI and looking at the options available to the company in circumstances where there have been increases in premium costs and increases the excesses being applied to claims.
He said the scale of the increases were such that they raised questions about the ability of Australian Financial Services License holders to maintain the levels of capital necessary to protect clients.
Rowe’s concerns reflect those of Infocus Wealth Management chief executive, Darren Steinhardt who has openly questioned the rationale behind the establishment of a compensation scheme of last resort.
While making clear he has no objection to self-licensing, Steinhardt has used a discussion paper to argue that much of the impetus for an industry-funded compensation scheme of last resort had been generated by “44 separate, small and under-resourced AFSLs who have been proven unable to comply with 177 Financial Ombudsman Service (FOS) determinations which affect 246 customers”.
Discussing the situation in the context of PI insurance, Steinhardt confirmed to Money Management that there had been a reduction in the number of PI insurers operating in the market not only generated by the fall-out from the Royal Commission but also by other events such as the construction faults with Sydney’s Opal Tower building.
Like Rowe, Steinhardt suggested that the cost of gaining and retaining PI cover was increasingly becoming something that could only be managed by larger firms with substantial capital backing – something which was beyond most smaller, self-licensed operators.
He said things had changed dramatically since the $20,000 bond which planners had been required to pay under the old Securities Dealer License.
Former dealer group chief executive and current board member, Paul Harding-Davis said it was clear PI insurers were concerned about the higher thresholds allowed under the new Australian Financial Complaints Authority (AFCA) regime and its ability to deal with matters dating bvack to 2008.
He said it was something that the Government and ASIC needed to take into account with respect to policy development in the industry.