Moonstone: PI Cover under the Spotlight
The determination by the FAIS Ombud against an FSP who invested client funds in Sharemax has taken a new turn with the FSP lodging an urgent application to prevent the Ombud from hearing complaints by investors who stand to lose money invested in Sharemax. Please click here to read the Personal Finance article.
What makes this interesting is that, according to Personal Finance, the FSP has the legal and financial backing of the company with whom the FSP took out PI cover.
FAIS CIRCULAR 11 of 2010, published on 13 December last year, provides information on the requirement to put in place suitable guarantees, Professional Indemnity Cover and/or Fidelity Insurance as published in Board Notice 123 of 2009.
The purpose of PI cover is described as follows:
PI cover protects a business against claims for loss or damage by a client or a third party if you have made mistakes or are found to have been negligent in some or all of the services that you provide for them. PI insurance will also cover legal costs. PI Cover thus provides cover when a claim is lodged against an FSP or its employees for restitution when a client has suffered losses or damages as a result of a professional action of the FSP or its employees.
Without access to the actual PI cover fine print, it is difficult to determine whether a claim would be sustained in a case such as this. The fact that the insurer is backing the FSP would seem to indicate that it is likely. This possibly stems from a concern that they would face a flood of claims from FSPs in the event of further determinations of this nature.
Part of the argument is that the Sharemax issue has not yet been resolved, so it is not a foregone conclusion that investors have lost everything.
From the actual determination, it appears that the Ombud’s finding is based on a number of transgressions of the FAIS Act, and not necessarily on the investment in Sharemax per se.
The practical application of PI cover is dealt with in great detail in the FSB’s telematic broadcast of 25 August 2011. The recourse available to an FSP in the event of the repudiation of a PI cover claim is explained as follows:
Some complaints were received from FSP’s regarding PI insurance claims that were repudiated as well as insurers unilaterally cancelling the PI contract.
Repudiation of claim:
In this instance the FSP is the client, the intermediary who sold the PI cover to the FSP is the advisor and the insurance company is the product supplier in terms of the FAIS Act. An FSP has the following recourse if the claim is repudiated:
- The FSP can approach the ombudsman for long-term insurance, if the claim relates to the long-term insurance Act, and institute a claim against the insurer.
- The FSP can approach the FAIS ombudsman, if the claim relates to advisory and/or intermediary services, and institute a claim against the FSP who sold the PI insurance cover.
- Legal recourse in a court of law.
Progress in this matter is going to be very interesting to follow. We recommend that readers download and study the Ombud’s determination and the Personal Finance article, as well as the FSB’s discussion of PI cover and a number of other matters of great importance to FSPs. Click here if you would like obtain a DVD of this FSB discussion..
A final thought: PI cover is compulsory. If claims increase, so will the cost of cover. Will the cost of running a sound business eventually become so high that the aim of regulation, namely protection of the consumer, lead to the required services only being available to the elite who can afford it? Those most in need of advice will not have access to it, and will be left buying products off the shelf in the supermarket, or from direct providers.
And how will that help them to make an informed decision?
