The FAAA is urging the Federal Government to resist blanket increases to professional indemnity insurance (PII) requirements, claiming higher cover limits would drive up costs for advisers.
In a submission to Treasury, which is consulting on potential reforms to PII in the financial services sector, the FAAA said reforms to the CSLR should take priority over changes to minimum PII settings.
Sarah Abood, CEO, FAAA, said recent collapses, including Dixon Advisory, United Global Capital, Shield Master Fund and First Guardian Master Fund, demonstrate that large-scale losses typically stem from product failures or systemic business models.
“CSLR reforms will have a greater impact on confidence and system integrity and need to be prioritised,” said Abood, pointing to special levies in the 2026-27 ($47.3m) and 2027-28 financial years. (See: Advisers Hit with CSLR Special Levy).
…compensation responsibility should extend beyond advice firms…
The FAAA states that compensation responsibility should extend beyond advice firms. It said managed investment schemes, research houses, auditors, and other responsible entities should play a greater role where product failure contributes to consumer loss.
Abood called for changes to AFCA rules, specifically the removal of Rule C1.5, which excludes complaints about the management of a scheme “as a whole”. The association said the rule has limited complaints against responsible entities of failed schemes.
She also urged the Government to consider mandatory insurance requirements further up the financial services value chain to ensure cover exists “…where the risk is created”.
The association also said policy reform is being conducted in a “data vacuum”, with little public information on premiums, claims accepted or rejected, or insurer profitability in the advice PII market.
…liquidators of failed advice firms often fail to defend complaints before AFCA…
In addition, Abood called on APRA to collect and publish detailed PII market data, and wants ASIC to make greater use of existing financial reporting and complaints data to assess whether licensees’ cover is adequate.
The FAAA recommends targeted, risk-based reviews of higher-risk licensees and clearer guidance to auditors on assessing PII adequacy.
The submission also claimed liquidators of failed advice firms often fail to defend complaints before AFCA or pursue insurance recoveries, increasing the burden on the CSLR.
The FAAA proposed the creation of a government-funded Friend of the CSLR to pursue insurance claims and other recoveries on behalf of consumers and the scheme.
It also recommended preventing insurers from cancelling PII policies solely because a firm enters liquidation, and requiring parent companies to maintain cover for subsidiaries placed into administration while they remain AFCA members.
Although the legal obligation to hold PII rests with licensees, Abood noted advisers typically bear the cost of premiums and CSLR levies. It called for greater transparency around how licensees apportion premiums and charge for run-off cover when advisers leave a firm.
