In response to a Financial Services Council (FSC) green paper from earlier this year, the Stockbrokers and Investment Advisers Association (SIAA) said there are a range of issues in the way that PI insurance intersects with advice firm failures.
According to the association, this very much includes the Compensation Scheme of Last Resort (CSLR), the design of which “excluded recognition of ASIC’s role in ensuring companies have sufficient capital adequacy and appropriate PI insurance to meet their internal and external dispute compensation obligations”.
It is “vital”, the SIAA said, that the actual source of unpaid determinations is understood to then reduce the risk to consumers and clarify if the CSLR’s design is “actuarially sound”.
The SIAA added that a consultation should have been held prior to the CSLR being introduced “given its importance in clarifying the source of unpaid determinations and reduction of risk to consumers”.
“To date, ASIC has not conducted a review of the level of PI insurance held by personal advice firms and it is not clear what role PI insurance has played in the high-profile collapses that have occurred,” the SIAA said.
“There is a lack of transparency on this issue. The current scheme is not operating as a true scheme of last resort. PI insurance should operate as the first line of defence so that the CSLR is truly a last resort for uncompensated losses.
“The scheme is not operating as intended because PI insurance is not responding to claims in the way envisioned during the scheme’s design.”
According to the SIAA, firms that are operating with an “appropriate level of PI cover” and paying their premiums are covering the costs for firms that don’t have appropriate PI cover.
“A small group of financial advisers has been left with a huge levy to pay for failures to which PI insurance has not responded,” it said.
“We consider that a review of the role that PI insurance plays in responding to recent high-profile collapses is needed to inform any reform in this area.”
On Friday, Financial Services Minister Daniel Mulino announced a Treasury consultation on “opportunities to enhance the effectiveness of professional indemnity insurance”, aiming to lessen the reliance on the CSLR for compensation claims.
This latest consultation paper is open to submissions until 13 February, with it explaining that the government is seeking a “more robust ‘first line of defence’ to fund consumer compensation” to ensure the sustainability of the CSLR.
“However, consideration of proposals to enhance the effectiveness of PII in responding to claims for compensation must also be viewed in the broader context of the supply, quality, and pricing of PII insurance and any related regulatory or business costs for licensees,” the paper said.
“This paper will inform development of reform options to support the ongoing sustainability of the CSLR. Further consultation will also occur early in 2026 through an options paper on broader reforms and technical changes to the CSLR itself to ensure it remains sustainable.”
