Margin lenders threatened by professional indemnity crisis

The providersof margin lending products could be the next victims of the worsening crisis over professional indemnity insurance for financial planners.

Of the five insurers who are still offering professional indemnity insurance to financial planners, three — CGU, Macquarie Underwriters and the American International Group (AIG) — are now refusing to cover the advice given by planners on margin loan investments, potentially restricting planners from recommending margin lending products.

The situation has led some of Australia’s largest margin lending product providers to lobby insurers directly in an attempt to ensure planning groups are able to recommend margin lending products.

The head of margin lending at the Commonwealth Bank, Paul Johnson, says the growing anxiety amongst financial planners over professional indemnity insurance is yet to impact on the business of margin lending product providers.

But Johnson says he has personally met with insurers on a number of occasions in an attempt to have margin lending exclusion clauses removed from the professional indemnity insurance contracts of financial planning groups.

The head of distribution at the St George Bank, Craig Mowell, who has also sought meetings with indemnity insurers, says they are often ill informed of the risks associated with financial planners recommending margin lending products.

“The professional indemnity insurers have to be made aware that risk management is a part of margin lending and that margin lending is a legitimate wealth accumulation strategy. I don’t think they have properly understood what margin lending is,” Mowell says.

The action by margin lending providers, which comes as some financial planners are struggling to find insurers to cover any part of their business, appears to have produced some results.

The Australasian regional manager for the AIG insurance group, Timothy Powell, says the margin lending exclusion has now become a standard clause in the insurance cover provided to financial planners.

But he says the insurer was prepared to waive the clause for some planning groups that could demonstrate appropriate experience with margin lending products.

However, Powell has also issued a dire warning to financial planners, saying that such exclusions, as well as higher premiums, were now permanently part of the indemnity insurance landscape for advisers.

In one case uncovered by the Financial Planning Association (FPA), the premium quoted for the professional indemnity cover of one financial planner jumped from $6,000 in 2001 to $66,000 this year.

“Financial planners whose insurance cover is coming up for renewal are going to find it pretty difficult,” he says.