Could financial advisers be in for a professional indemnity premium shock?
The North Gauteng High Court decision in the matter between D Risk Insurance Consultants CC (backed by its professional indemnity insurer Stalker, Hutchinson and Admiral) and the FAIS Ombud will be announced shortly. As we wait for the Judge’s ruling we h
Intermediaries’ PI indemnifies the insured against their legal liability to pay a third party compensation for losses in respect of delictual liability arising out of any negligent act, error or omission in the performance of their professional duties. The cover also provides for the payment of legal defence costs subject to the insured (at their cost) providing [Santam] with their assistance so that we may investigate, defend or settle any claim made against them.
An unfair attack on an insurance giant
Santam has come under fire in the media due to its involvement in the D Risk matter: Stalker, Hutchinson and Admiral (SHA) is an underwriting manager and provides professional indemnity cover that is underwritten by Santam. “We have noted the continued reports suggesting Santam is involved in an attack on the ability of the FAIS Ombud to continue to make determinations against Deeb Risk and D Risk Insurance Consultants,” says Donald Kau, Head Corporate Affairs at Santam. “This is not the case… In the instance of the reported court actions, Santam is required, in terms of its policy with Deeb Risk, to provide legal defence cover and to advance its defences, and is acting within the parameters of this legal contract with the client”.
Financial advisers will know that their PI cover contains numerous exclusions – just like the life and short-term insurance policies they peddle. “As with all insurance policies, Santam excludes certain risks that for specific reasons we do not wish to cover – these will and do change from time to time,” says Kau. Santam exclusions that are specific to the financial advisory profession include losses resulting or arising from:
- The insolvency or liquidation or failure of the insured or any insurer or any investment vehicle or scheme where the claimant has invested on the advice, assistance, promotion or recommendation of the insured;
- The intentional, dishonest, criminal or malicious act or omission committed by or alleged to have been committed by or on behalf of the insured;
- Any third party claim arising directly or indirectly out of failure by the insured to meet the requirements, conditions, obligations and restrictions imposed upon the insured in terms of the insured’s FAIS license;
- The depreciation, diminution (or failure to appreciate) in value of any investments, including securities, commodities, currencies, options and futures transactions, or the failure to appreciate in value of any investments, including securities, commodities, currencies, options and future transactions;
- The failure of any guarantee, warranty, or contractual undertaking given by the entity in which an investment is made, or any alleged or actual representation , guarantee or warranty provided by or on behalf of the Insured as to the performance of any investments;
- The provision of investment advice or the administration of any funds in contravention of or in any way breaching the Banks Act, (Act No 94 of 1990) or any amendments thereto. (This exclusion will also apply to claims following from investments where the product supplier or financial services provider had acted or administered funds in contravention of the act whether the insured should reasonably have been aware of this breach or not); and
- Mis-selling or allegations thereof.
What happens to D Risk Insurance Consultants if the court rules against it? And does the PI insurance cover the various damages awards made by the FAIS Ombud against the brokerage? Santam is not keen to comment further until after the judgement. “In the event that Deeb Risk is found to have acted wrongly in the Sharemax matter, Santam will pursue the appropriate actions in terms of the clients’ policy conditions,” concludes Kau.
The escalating premium consequence
We received dozens of responses to last Wednesday’s newsletter on the topic. Among them was a comment from Gavin Came, who suggested that the consequences of any or all of the professional indemnity insurers being forced to pay in the Sharemax matter – or in the event of any other institutional failure – be considered. “The PI insurers would end up being the de facto insurer of last resort for institutional financial losses – a kind of indemnity fund for investors,” he said. Came believes that professional insurance premiums will skyrocket for all intermediaries in the event the High Court Ruling goes against D Risk and SHA.
Whether the ruling is for or against D Risk it will have far reaching implications for the financial services industry. A ruling in favour of D Risk will find resonance among the many who feel the current dispute resolution process is flawed. Their main complaint is that the FAIS Ombud decisions are often not based in law, a requisite for a fair dispute resolution. Another reader, Barry Pringle, observes: “I am currently disputing a totally incorrect [FAIS Ombud] decision involving a complete misinterpretation of the policy wording”. Despite being wrong the Ombud’s decision is final and the aggrieved party has no recourse but to challenge the decision in the courts.
Editor’s thoughts: The quantum of loss in the Sharemax debacle is forcing all financial services stakeholders to pressure-test the regulatory environment. Financial advisers, product providers and the Financial Services Board could all be in the firing line as out-of-pocket investors seek compensation. Will the professional indemnity cover pay out if D Risk Insurance Consultants fails in its bid to overturn the FAIS Ombud decision? Please add your comment below, or send it to gareth@fanews.co.za
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