ASIC today released an updated version of Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126).
ASIC has removed the requirement for Australian Financial Services (AFS) licensees to obtain automatic run-off cover. Previously, AFS licensees were required to obtain professional indemnity (PI) insurance policies that included 12 months automatic run-off cover from 1 January 2010.
Automatic run-off cover is cover for claims made after the insurance policy has ended which have arisen from the acts or omissions of the insured during the period of insurance cover. The cover is negotiated upfront at the commencement of the PI insurance policy, rather than separately.
ASIC has decided to remove the requirement to obtain automatic run-off cover as it is not available to AFS licensees in the current insurance market. We will continue to monitor the availability of automatic run-off cover and may reassess our position should the market soften and automatic run-off cover become available.
The changes mean that:
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until 31 December 2009 – adequate PI insurance is based on what is available in the market now, provided it meets the minimum requirements outlined in Section C of RG 126; and
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from 1 January 2010 – in addition to the above, AFS licensees are required to obtain switching cover that covers the situation where an AFS licensee moves a client from a product that is not on the approved product list to one that is on the approved product list.
The revised version of RG 126 also clarifies that fraud cover is not required for licensees who are sole traders.
Background
RG 126 sets out how ASIC will administer the compensation requirements under s912B of the Corporations Act 2001 (Act). Section 912B requires AFS licensees to have arrangements for compensating retail clients for losses they suffer as a result of a breach by the licensee or its representative of their obligations in Chapter 7 of the Act. Under these arrangements, licensees must obtain PI insurance that is adequate having regard to the nature of the licensees business and its potential liability for compensation claims, or be approved by ASIC as alternative arrangements. In determining what is adequate insurance, ASIC will take into account what is available in the market.