Planners face ‘massive’ PI shortfall

Financial planners could potentially be left uncovered for unlimited professional indemnity (PI) insurance liability if insurers refuse to embrace new changes to the way in which Financial Industry Complaints Service (FICS) applies its monetary limits.

The changes, which FICS claims were forced upon it by a recent Federal Court judgement, have effectively scrapped the previous $100,000 liability limit to which planners were subject.

By its own example, carried in the April edition of FICSBulletin — which introduced the changes effective from April 2, this year — planners potentially face liability to individual FICS complainants of $300 000, or a 200 per cent increase on the previous limit.

This will potentially leave a liability shortfall of $200,000 for individual planners if, as appears to be the case so far, PI insurers refuse to come to the party with FICS on the new changes.

If that were not bad enough, lawyers approached by MoneyManagement for comment on the changes have calculated from its wording, particularly with regard to what constitutes “separate instances of advice/transactions”, that planners could potentially face unlimited liability.

The changes state in part that FICS “will award consumers compensation up to $100,000 for every claim against (planners) for losses suffered for separate instances of advice/transactions”.

Prior to April 2, FICS would apply a total monetary limit of $100,000 in compensation for losses suffered by a client as part of an ongoing client relationship or documented financial strategy.

Lawyers Jonathan Winter and Stephen Hughes, both professional services advisers at Perth-based insurance broking firm Strathearn Insurance Brokers, have calculated liability at up to $1 million.

“(If FICS) is talking about many acts from a particular product recommended three or four years previously, and if each of these are (deemed) separate acts, you could be talking $1 million.”

At the same time, according to Winter and Hughes, PI insurers have generally retained their “limits for financial planning matters for any one claim at the $100,000 limit”.

“Insurers’ have not changed the limits in their policies, and their interpretation (of liability) is as it always has been, if you like.

“The key issue is that insurers don’t want to give up the rights that they would have under the policy they have with clients,” the lawyers said.

Financial planning specialist lawyer Mark Halsey, of Halsey Legal Services, said “unless insurers align their definition of a claim with the new FICS definition, the result will be detrimental to FICS members”.

“Insurers may argue that their liability is restricted, because their FICS endorsements are limited to $100,000 under claims as defined by the policy, which may not necessarily be the same as claims as defined by FICS,” he said.

FICS legal counsel Michael D’Argaville responded that the “extent to which a PI insurer will pay … will depend on the terms of the insurance contract between that insurer and the financial planner in question”.

He said FICS has been “engaged in discussions with PI insurers with a view to improving their understanding of the FICS process, and to encourage them to consider increasing the extent to which they provide cover in respect of FICS complaints”.

The liability situation facing planners could be exacerbated by a pending, as yet undecided increase in the FICS limit beyond the current limit of $100,000.

FICS is set to release an ‘issues paper’ seeking “stakeholder feedback as to what an appropriate increase on the current limit will be”, according to chief executive Alison Maynard.