We do our fair share of mythbusting around insurance products like Professional Indemnity, Directors and Officers Insurance and Crime or Bond covers. But none more so than when it comes to RG126. So here are a few pointers to get you through your renewal whilst making sure you are meeting the requirements of the Regulatory Guide.
It’s all about “Adequacy”.
Adequate cover, limits and terms and conditions that manage your risk is key to meeting the requirements under the guide.
Exposure can be subjective, but things like your clients, their composition, stage of life, funds under advice, the types of products being offered and your approach to investing all play a part in establishing what a major complaint or event may look like. It’s this which you are ultimately insuring for.
It’s also a more pragmatic approach as many advisers may find that they can satisfy the requirements with a lesser policy limit. Many will find the opposite and need to increase the cover, however no single practice is the same, and a thoughtful discussion with your broker can assist greatly in navigating the complexities around the guide.
There are some fundamentals, however.
Myth #1.
“I have to have a $2,500,000 limit as a minimum requirement”. No you don’t.
The minimum PI requirements for retail advisers is $2,000,000 for a single claim where the policy pays legal costs and expenses necessary in your defence in addition to this amount. If your policy includes your legal costs in the policy limit, you will need to increase this accordingly.
Myth #2
“I have to have a policy limit equal to my retail revenue.” No you don’t.
What you need, is to ensure that you have an “adequate” limit of indemnity to meet the claims of retail clients. This is more nuanced than the 1:1 approach of revenue and as such, you may require either more, or less than this ratio to be adequately insured.
Myth #3
“I have a 50/50 book of retail and wholesale clients, I just need to insure the retail revenue.” No, you need to consider your clients holistically.
The guide requires advisers to have cover for retail clients, but it also makes the point that where cover may be eroded by wholesale clients, that there is sufficient policy limit to meet retail clients. So in most cases, the presence of wholesale clients means you need to increase the limit rather than reduce it.
Myth #4.
“Only my retail clients are covered by PI, not wholesale.” No, we can’t recall in recent times, seeing a policy that excluded wholesale advice or clients.
Check with your broker, but generally speaking, PI for advisers is broad enough to cover both retail and wholesale investors.
Myth #5
“Only my retail clients are a risk as wholesale investors have less protections and don’t have access to AFCA.” Yes, and No.
Whilst it is correct that wholesale status investors don’t have access to AFCA, it is increasingly common that clients treated as wholesale are reclassified to retail when there is an issue. And wholesale investors still have access to the courts to bring action against an adviser that is alleged to have acted negligently irrespective of their status so it’s important to consider these clients as a risk to be managed just like retail clients.
The best approach is always to get quality advice. This should include how best to manage your risk, your obligations under the guide and to ensure that you are compliant. A good insurance broker will be intimately across the guide, its operation and what it means for you.
Call Numerisk on 1300 001 283 or email at enquiry@numerisk.com.au