The Value of Statutory Liability Cover for Advisers

GUEST COLUMNIST – CLINTON STANGER

Liability cover for financial advisers often focuses on professional indemnity. However, FAPs can be exposed not only to new legislation, but a new focus on enforcement, writes Curated Risk‘s Clinton Stanger…

Legislation in New Zealand’s financial services industry has changed significantly over the past few years, meaning FAPs can be exposed to not only new legislation, but a new focus on enforcement from the regulator. This inevitably creates an environment where transferring this risk to an insurance policy is by far the most logical solution for FAP practices.

Defending a breach of the law would not only be a substantial cost to a FAP, but if uninsured would be a significant interruption to the day-to-day operation of their business.

While PI provides cover against civil claims by third parties for financial loss, it is totally different to statutory liability cover. Ideally, statutory liability insurance should be a part of the mix and could be included in a wider management liability package or as standalone cover.

A statutory liability insurance policy protects against a prosecution or official investigation following an unintentional breach of most New Zealand laws and regulations.

As with all liability insurance policies, it is the defence cover that is most valuable, as defence costs are more often higher than the penalty awarded. 

The policy also covers fines and penalties payable following conviction for an offence under an insured statute, except under the Health and Safety at Work Act (such fines being uninsurable at law).

Most insurers have imposed a higher excess in respect of financial services legislation, or a claim, or investigation brought by the FMA. The premium cost for statutory liability is negligible compared with the exposure and impact of being uninsured.

Example

An adviser is notified that the FMA has received a complaint alleging they have breached the Financial Markets Conduct Act 2013 and are investigating further. The adviser receives a notice under the Financial Markets Authority Act 2011 requiring them to supply information, produce documents, and attend an interview.

Next steps

• Defence counsel are appointed to check the validity of the notice, negotiate a reasonable deadline for responding to the information request, and attend the interview
• The counsel then becomes the primary contact for the FMA and therefore minimises the interruption for and stress on the adviser
• Counsel then assist the adviser in collating and supplying the information and attends the interview with the adviser
• They liaise with the FMA after the interview and supply further relevant information that arises during the interview

Possible outcome

The FMA decides not to undertake enforcement action. Part of this outcome is achieved by working with the adviser and identifying changes the adviser should make to their practice to satisfy the FMA that they met their obligations.

The legal fees in the above scenario could well exceed $25,000. 

Health and Safety at Work 

Although fines from the Health and Safety at Work Act are prohibited from being insured, defence costs and reparation awards ordered by the court are covered by the policy.

Health and safety at work exposures for financial advisers are generally low. However, advisers who travel long distances to meet clients have increased exposure compared to general office work. 

The Act puts an active duty on those in a governance role to proactively manage health and safety. These strict liability responsibilities should not be overlooked by any business, including a financial advice provider.

 Loading ...