It’s a hugely controversial topic of discussion in the adviser community, the impact of Dixon Advisory, and the costs met under the compensation scheme of last resort (CSLR). It’s the most significant product and advice failure in recent times, with the federal court, in 2022, passing a judgment against Dixon Advisory carrying a penalty of $7.2m and $800k in costs – but this was just the ASIC proceedings. There remains still the case for compensation for the clients of Dixon Advisory, with some estimates that the CSLR will need to provide up to $135m for losses resulting from client best interest failures. A considerable amount to be borne by a community of advisers, halved in number in the past four years post Hayne and still coming to terms with the outcomes of that Royal Commission.
Of note is the recent announcement of a senate inquiry into Dixon and CSLR; many across the wider industry will be watching with trepidation on this process and the outcomes.
“There is nothing so finely perceived and so finely felt, as injustice”….
Charles Dickens
The topic of Dixon starts to illuminate some of the critical considerations for advice practices and those holding AFSLs and advice risk.
The unholy Trinity of Claims for Financial advisers – understanding the three areas that major losses originate from.
Product failure
This is the number one consideration for the majority of PII underwriters and the nucleus of questioning across most facets of the process that advisers and AFSL holders undergo at the renewal of a PII program. A practice or AFSL that has either incorporated a product into a model portfolio or has been widely advised and deployed across many clients and subsequently fails is a critical consideration for insurers. It’s the stuff made of nightmares. And whilst uncommon, as we have seen with Dixon, it’s possible.
Higher-risk products become scrutinized, Approved Product Lists become very important, and clients that may not be appropriate for certain types of investments are reviewed, at times, in forensic detail.
From the adviser’s perspective, SMA solutions with professional portfolio managers can be an attractive way to achieve a number of benefits, one being an additional layer of professional due diligence across products and investment options being put forward to clients.
Many PII policies have inherent weaknesses in the way multiple claims originating from the same cause are managed, and for larger AFSLs, some care needs to be taken when reviewing coverage as getting these provisions wrong can often result in years of litigation with both claimants and the insurance company entrusted to provide coverage.
Fraud
Fraud is a complex beast and one that is very difficult to anticipate. The stories of the rogue adviser running a “side” sham investment scheme or simply falsifying statements and records are not uncommon, and the outcome can be devastating for advisers and clients alike. Equally, it’s not a surprise for many to know that small amounts of money being stolen over an extended period of time from an employer is a common occurrence across many businesses. These losses are often either uninsured or have very low levels of cover.
Fraud is also a consistent source of large losses, some in excess of $10,000,000. An amount that most practices and AFSLs simply could never recover from. There are some telltale signs, however;
-
These events are often perpetuated by a highly trusted long-term staff member whose involvement or role in the business is integral. Often, the behaviours are driven by factors unknown to the employer, like gambling, family problems, or issues around drug and alcohol dependence.
-
Staff members unwilling to take annual leave or extended periods outside the business can be a flag; often, the “systems” used to defraud are complex and come with a fear of discovery. A common risk management tool amongst businesses with employees with access to accounting or finance is enforced leave periods of two or more weeks. These periods can be sufficient to ensure that there is never a key person risk or dependence, making fraud over long periods more difficult.
-
Lifestyles that seem excessive or leave questions around how these are achieved given a certain income or salary range can be an indicator for fraud. Social media platforms can reveal much about a person out of work behaviour or activity, and regular posts at events or with expensive holidays, clothing, or vehicles can be a flag worth considering.
Life and Risk Insurance
Commonly overlooked and likely not considered, the risks associated with insurance are significant and are a common source of large claims and losses. The scenario most commonly plays out in an operational context; a policy is cancelled and not replaced or changed to an alternative provider, and the policyholder or beneficiary suffers a major event. During the claim, it’s identified that either the policy is not current or the cover isn’t adequate under an exclusion or other policy language that has imposed additional requirements not met. Given the costs associated with these types of claims, the value can run well over a million dollars from very simple operational errors. Ensuring strong protocol around insurance and peer review post-placement can be a great way of catching errors before they become bigger issues.
How not to get caught in a trap
Greater awareness of the origination of significant claims or matters that can become difficult and complex is important when navigating the approach to risk management and the PII options available in the market. The good news is that PII conditions are easing, and what might have been a discussion primarily driven by cost and availability in past years is now being overtaken by thoughts around coverage, terms and conditions.
Ensuring that the quality of advice being dispensed by your insurance adviser is thorough and considered and that you have absolute confidence should be a key metric at renewal for all advisers and AFSL holders.
A guide to getting the right advice
Getting good advice is important; here are a few considerations that could make the difference between being covered and on your own;
- Is my adviser an expert with specialist expertise in advice and financial services?
- Does the engagement feel similar to the way I provide advice to clients, and if not, why?
- Do I have confidence? The undeniable sense and feeling of care that comes from getting service that matters.
- Am I getting options? How extensive is the work in the background to ensure that I’m getting a technical solution that is also tested in the market and cost-effective?
General insurance can be complex and highly nuanced but making absolutely sure you have confidence and are being supported by high-quality advice is a great way to avoid getting caught out.
Improve your insurance outcome, get in touch.
Get in touch with our team to have a chat about the details of your existing insurance coverage and to identify ways to improve your insurance outcome.
Book a 30-minute consultation with our team.
Call us on 1300 001 283
Or email enquiry@numerisk.com.au