The jury is still out on whether FoFA will succeed in weeding out rogue traders. But according to senior professional indemnity and D&O industry participants, it’s more likely to raise costs for all advisers.
Less than 10% of professionals surveyed by law firm Moray & Agnew believe FoFA will help ASIC weed out rogue traders (9.09%). But about 38% expect the premiums for financial advisers to shoot up – 22.73% by up to 10% and 15.15% by 11-20%.
“The financial services industry formed the view early on that FOFA would push up the cost of financial advice so in that respect these results are not surprising. However, if the objective of the reforms was to provide further protection for consumers, the industry is dubious that outcome will be achieved,” said Moray & Agnew partner Geoff Connellan.
Bluepoint Consulting just finalised its cover two weeks ago, and managing director Todd Karamian says they had to negotiate down from a 30% premium increase. It was the same cover, and they hadn’t had any changes to their practice over the past 12 months. They eventually negotiated a slightly smaller increase, but the insurer ended up coming back with some new restrictions.
“Insurance companies are happy to negotiate, but don’t expect the same terms,” said Karamian.
“I personally don’t think they can justify their premium increases. It’s not like [FoFA] is a new rule to make advice poorer so therefore higher risk for insurance companies. This is designed to make advice better if anything.
“Unfortunately there are so many players that have exited the insurance market that you’re left with a handful of providers and it’s an oligopoly in effect. A few of them control the whole market and they do whatever they want. And we have to have cover.”
Michal Bodi of Sydney Financial Planning hasn’t experienced an increase yet, but can see it happening in the future. He thinks that it will differ with different licensees depending on their size, as well as past compliance reputation and history.
“I would recommend that businesses deal with the issues before they arise, get in touch with their licensees and PI providers and initiate discussions around changes brought by FOFA. In particular, when it comes to best interest duty and the implication of the wide definition of ‘reasonableness’.”
However, FoFA is not the only culprit for the possible increases. Connellan says that Australia’s growing class action mentality, on top of the aftermath of the GFC, the still weak economy, and the emergence of litigation funders, has created “fertile ground” for claims against participants in the financial services sector.
The financial services sector includes advisers, director, accountants, building professionals and real estate agents/valuers. Of all the professions, insurance professionals believe advisers have the highest risk of claims (35%), while only about 11% believe real estate agents and valuers are at risk.
Karamian says that he has to agree with the findings, simply because the process of complaining about advisers has become so easy for consumers, whereas there is not the same process in place for property professionals.
“Financial advisers are at a much higher level of receiving complaint – even though I think real estate agents should be receiving more complaints.”
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