Part 1 of my letter to Chris Bowen regarding PI insurance and ASIC's responsibilities under Section 912B of the Corporations Act for administering such.
The Hon. CHRIS BOWEN
Minister for Financial Services, Superannuation and Corporate Law
PO Box 6022
Parliament House
Canberra ACT 2600
22nd February 2012
Dear Sir,
Re: Professional Indemnity Insurance – “Lessons still to be learnt!”
Past events where Storm Financial and the Banks are concerned have demonstrated to me that this Government and ASIC will behave wisely only when they have exhausted all other alternatives.
I together with thousands of others lost our lifesavings when Storm Financial collapsed in early 2009. I have spent the time since then delving into what brought about the failure of this major financial advisory firm and the reasons why so many lost everything. Based on the evidence at hand, the blame does not lie fully with Storm Financial and the Banks closely allied with that firm. Rather, it must be shared in equal part by our Government and ASIC - the consumer credit regulator.
At the time that we and countless others, acting on Storm’s advice, invested in the market place, we were under the impression that we were protected by statutory regulations and compliance systems that would effectively protect us from malpractice. Sadly, we were mistaken. The simple truth is that this and past Governments have failed in their duty of care to the Australian people because despite numerous instances of past malfeasance in the financial sector occurring at regular intervals, Governments have let this situation continue to fester unabated. Now, with the collapse of Storm and other financial institutions, the Government has at last seen fit to introduce reforms that are designed to restore investor confidence and reassure one and all that another “Storm” cannot occur again!
Believe me, another “Storm” is just over the horizon if this Government and ASIC continue with their “liasse-faire” economic doctrine of non-interference in commerce beyond the minimum necessary for a free-enterprise system to operate according to its own economic laws. Nowhere is this more evident than with regard to “professional indemnity insurance”.
I have written to ASIC on a number of occasions regarding our experiences when attempting to claim against Storm’s insurers, and the deficiencies that still exist today with regard to “professional indemnity insurance” despite the new regulations that now exist.
Attached, you will find copies of ASIC’s letters I have received in response to mine on this subject. These letters, dated 17th March 2011 and 13th February 2012, explain the requirements under the regulations as far as taking out PI insurance cover by financial advisers is concerned. Unfortunately, in its correspondence ASIC not only fails to answer my queries satisfactorily, but also clearly displays an approach that is ineffectual when it comes to, what I consider to be, one of the most important issues in the financial sector today; namely adequate professional indemnity insurance. This type of insurance cover for financial advisers, that should effectively protect investors, has been ineffectual in the past and will continue to be inadequate if nothing is done to rectify the situation. Quite frankly, the recent changes in the regulations in this regard simply do not go far enough!
With respect, this “head in the sand” approach to professional indemnity insurance by this Government as well as ASIC just begs for “more of the same” because it fails to address the real issue – namely professional indemnity insurance cover that fully protects investors’ rights. You can only have an effective PI insurance cover if it contains a “run-off” clause.
The argument that PI insurance is a protection afforded to the party taking it out rather than to a third party doesn’t wash! Investors need to know that sufficient assets/funds are available if any financial adviser they employ transgresses. Effective and adequate PI insurance offers them that assurance.
Following the collapse of Storm Financial, we, the Storm investors, had to wait more than a year before we could ascertain the name of Storm’s insurers, who were AIG, because ‘Worrells’ (the appointed liquidator) would not release such to us. Then, I found that when I lodged a claim with AIG for our losses due to “misleading and deceptive conduct” by Storm, our claim was repudiated because Storm did not have a “run-off” insurance cover thus restricting the lodging of claims to the period covered by the insurance policy.
Professional indemnity policies such as that taken out by Storm are triggered by claims made against the insured (in this case Storm) during the policy period. In other words, coverage is triggered by a claim being made during the policy period, rather than the conduct giving rise to the claim occurring during the policy period. Herein lies the problem!
AIG did provide”claims made" professional indemnity insurance to Storm for the period 21 November 2007 to 10 December 2008. For any claim made by us to be acceptable, two things would need to have occurred during the period of the 07/08 policy to trigger indemnity under that policy:
(1) We would have had to make a claim for damages against Storm during the 07/08 policy (We were not in a position to do so until late 2009) or
(2) Storm would have had to have notified facts or circumstances (that might give rise to our claim) to AIG during the 07/08 policy period.
Because the 07/08 policy did not contain a “deeming clause” it effectively restricted us from pursuing our claim under this policy. We have been told that even if Storm had been aware of our claim (which it wasn’t) during the 07/08 policy, it would not have been enough because our claim needed to be lodged within the life of that particular cover.
Storm’s PI insurance was an industry standard rather than an exception. I wonder how many people truly understand their position in relation to financial advisers’ professional indemnity insurance when seeking financial advice. None, I would think! If they did, I doubt that many would entrust their financial well-being to professionals that do not have adequate PI insurance? What’s the use of having PI insurance if claims cannot be made against it through being time barred? To allow such a situation to continue unabated is tantamount to lunacy. But then there’s been quite a bit of that lately where politics is concerned.
There is no question in my mind that the PI insurance taken out by Storm Financial and many other financial advisory individuals/firms for that matter, does not comply with Section 912B of the Corporations Act because such policies by their very nature do not have the capacity to compensate retail clients because of time restrictions. I therefore put it to you that this Government and ASIC failed in their duties and responsibilities to Storm’s investors (and continues to fail others as well) with regard to PI insurance because Section 912B of the Corporations Act could not, and still cannot be fulfilled in the majority of cases.
In ASIC’s letter 13/2/2012, it quotes part of the ACT:
“Section 912B(1) states that a financial services licensee that provides a financial service to retail clients must have arrangements for compensating those persons for loss or damage suffered because of breaches of their obligations under the Act by the licensee or its representatives. The arrangements must meet the requirements under subsection 2.
Subsection 2 states that the arrangements must:
(a) if the regulations specify requirements that are applicable to all arrangements, or to arrangements of that kind - satisfy those requirements; OR
(b) be approved by ASIC.”
ASIC then go on to say, “So, in essence section 912B allows a licensee a choice about which arrangements to implement.”
Yes! I agree that Section 912B allows a licensee a choice about which arrangements to implement but it doesn’t mitigate this Government or ASIC’s obligation under the Act; namely to ensure “that a financial services licensee that provides a financial service to retail clients must have arrangements for compensating those persons for loss or damage…”
The wording in this Section is specific and unequivocal. How, therefore, can this obligation be met if the insurance cover is both inadequate and ineffective as was the case with Storm Financial’s indemnity insurance? How can ASIC now turn around now and state, “So, in essence section 912B allows a licensee a choice about which arrangements to implement.” What does that have to do with anything? For that matter, what good are having arrangements in place if those arrangements DO NOT “compensate persons for loss or damage” because the policy does not contain a “deemng clause”?
Is the Corporation Act an instrument that ASIC and this Government can interpret as they see fit or does it have some substance in Law?
[Continued in Part 2]