Parliamentary Secretary to the Treasurer
26 October 2004 - 3 December 2007
FINANCIAL SERVICES’ COMPENSATION ARRANGEMENTS ANNOUNCED
Chris Pearce, the Parliamentary Secretary to the Treasurer, today announced that a regulation to complement section 912B of the Corporations Act 2001 (the Act) is expected to be made by 1 July 2007. The Act requires financial services licensees that provide financial services to retail clients to have in place appropriate compensation arrangements. The arrangements must either be approved by ASIC, or satisfy the requirements specified in the regulations.
The proposed regulation will specify that section 912B is satisfied if licensees have professional indemnity insurance in place. Certain bodies which are regulated by the Australian Prudential Regulation Authority will be exempt from this requirement.
“The regulation will reduce the possibility that affected licensees will not have adequate cover in place to compensate retail clients in the event of a successful claim,” Mr Pearce said.
The regulation is expected to have particular impact where inappropriate financial advice has been given and the retail client loses money as a consequence. The regulation will operate in tandem with existing provisions in the Act that provide avenues for retail clients who have suffered loss due, for example, to a defective advice document, to claim compensation from the licensee.
Licensees which provide services to retail clients are already required to have an internal dispute resolution procedure and be a member of one or more external dispute resolution schemes, such as the Financial Industry Complaints Scheme. There are also existing common law avenues of redress that allow investors to claim compensation in circumstances where financial advice has been negligent.
“Many licensees already have professional indemnity insurance in place,” Mr Pearce said. “The Financial Planning Association, for example, requires professional indemnity insurance as a condition of membership, as does the ASX of participants.
The regulation will also include transitional provisions and provisions relating to the return of the security bonds held by the Australian Securities and Investments Commission (ASIC).
The regulation will be supplemented by ASIC guidance. The draft guidance note, which will assist licensees to put appropriate arrangements in place, will be released by ASIC for public consultation at the time the regulation is made.
An earlier draft regulation was released for public consultation in November 2006. The comments received as part of this process have been taken into account in framing the final regulation. “Many industry participants have provided positive feedback on the regulation and have welcomed the Government’s approach,” Mr Pearce said. “I believe the regulation will work well given this feedback.”
18 May 2007
Contact: Conor O’Brien (03) 9887 3890 or 0402 970 515
Section 912B of the Corporations Act 2001 requires financial services licensees that provide financial services to retail clients to have appropriate compensation arrangements. The arrangements must be approved by ASIC or satisfy the requirements specified in the regulations.
ASIC ‘turned off’ the requirement to comply with section 912B in 2002, and it is due to expire on 30 June 2007. The ‘turning off’ was due to many factors, including the hard insurance market suffered globally in the wake of September 11 2001, and the collapse of HIH. This Government in conjunction with the States and Territories resolved the problems around tort liability and this is proved in the softening of the insurance market since then, which has also positively affected the availability of professional indemnity insurance.
In November 2006, a draft regulation was issued for public comment. The proposed regulation will provide for certain licensees to be exempt and require other, non-exempt licensees, to have professional indemnity insurance.
Treasury received 32 submissions from a wide range of interests in response to the draft regulation. The consultation paper and published submissions can be reviewed on the Treasury website.
The draft regulation was amended in the light of the submissions received. Changes generally relate to areas of misunderstanding and ambiguity in the draft regulation, and the proposed requirement for licensees to disclose their arrangements in their Financial Services Guide.
Many financial advisers already have professional indemnity insurance as it has now become a standard element of best business practice in the financial services industry. Mandating professional indemnity insurance as proposed under the regulation is intended to reduce the possibility that affected licensees will not have adequate cover in place to compensate retail clients in the event of a successful claim, but investors need to be aware that there may be situations where claims cannot be met. Investors can check that their financial adviser has appropriate compensation arrangements in place by referring to the Financial Services Guide.