Chris Pearce, Parliamentary Secretary to the Treasurer, has announced that regulations to complement section 912B of the Corporations Act 2001 (the Act) have been made and will operate from 1 July 2007.
Under section 912B, Australian financial services licensees (licensees) providing a financial service to retail clients must have arrangements for compensating them in the event of monetary losses suffered due to breaches of relevant obligations under the law. This may include providing inappropriate advice, or false or misleading conduct.
Licensees which provide services to retail clients are already required to have an internal dispute resolution procedure and be a member of one or more external dispute resolution schemes, such as the Financial Industry Complaints Scheme. There are also existing common law avenues of redress that allow investors to claim compensation in circumstances where the financial adviser has been negligent.
The new regulations provide that section 912B is satisfied if licensees have adequate professional indemnity insurance in place, subject to certain transitional periods. The transitional provisions allow time for licensees to put appropriate arrangements in place before the requirements apply. The regulations also deal with the return of the security bonds to licensees by the Australian Securities and Investments Commission (ASIC).
The new regulations follow extensive consultation with key stakeholders to determine appropriate compensation arrangements.
Certain bodies which are regulated by the Australian Prudential Regulation Authority are exempt from this requirement.
The regulations will be supplemented by ASIC guidance which will be released by ASIC in draft form for public consultation shortly.
“I would like to thank all stakeholders for their assistance in providing feedback on this important issue,” said Mr Pearce.
29 June 2007
MELBOURNE
Contact: Conor O’Brien - (03) 9887 3890 or 0402 970 515
BACKGROUND
Section 912B of the Corporations Act 2001 requires licensees that provide financial services to retail clients to have appropriate compensation arrangements. The arrangements must be approved by ASIC or satisfy the requirements specified in the regulations.
Due to many factors, including those affecting the professional indemnity insurance market, section 912B was ‘turned off’ until 1 July 2007. Many licensees however, already have professional indemnity insurance as it has now become a standard element of best business practice in the financial services industry.
Mandating professional indemnity insurance under the regulations is intended to reduce the possibility that affected licensees will not have adequate cover in place to compensate retail clients in the event of a successful claim. Once the adviser has transitioned into the new regime, investors will be able to check that their licensed financial adviser has compensation arrangements in place by referring to the Financial Services Guide. However, investors need to be aware that there may be situations where claims cannot be met.
The adequacy of the cover will be subject to a number of factors including a realistic assessment of potential liability the licensee may face arising out of their membership of an external dispute resolution body. Other factors to be taken into consideration relate to the nature of the licensee's business activities.
Consultation on the final regulations commenced in November 2006, when draft regulations were issued for public comment. Again in June this year, following incorporation of those comments, further targeted consultation was undertaken.
Treasury received 32 submissions from a wide range of interests in response to the draft regulations in November 2006, and 11 in June 2007.
The draft regulations were amended in light of the submissions received. Changes generally relate to areas of misunderstanding and ambiguity in the draft regulations.