Australia: Compensation And Insurance Arrangements: ASIC Regulatory Guide 126

On 28 March 2008 the Australian Securities & Investments Commission (ASIC) released Regulatory Guide 126 entitled 'Compensation and insurance arrangements for AFS licensees' (RG126). RG126 sets out how ASIC will administer the compensation requirements under section 912B of the Corporations Act 2001 (Cth) (Corporations Act).

Section 912B requires Australian Financial Services licensees to have in place arrangements for compensating retail clients for losses they suffer as a result of a breach by the licensee, or its representative, of their obligations under Chapter 7 of the Corporations Act (Chapter 7 relates to financial services and markets).

The arrangements must satisfy the requirements in the Corporations Regulations 2001 (Cth) which are that AFS licensees must obtain professional indemnity insurance cover that is "adequate" having regard to the nature of the AFS licensee's business and its potential liability for compensation claims or must be an alternative arrangement approved by ASIC. RG 126 makes it clear that the onus is on the AFS licensee to take responsibility for assessing what is "adequate" for them.

RG 126 includes in Sections C and D what ASIC considers are the features that a professional indemnity policy should have in order to be "adequate".

ASIC has a two stage approach for implementing RG 126:

  • an implementation period of two years from 1 January 2008 to 31 December 2009 during which AFS licensees must have insurance in place with minimum standards which comply with Section D of RG 126; and
  • by 1 January 2010 AFS licenses must have insurance in place which complies with the standards in Section C of RG 126.

For existing licensees, the timeline for the implementation of the Section D standards is from 1 July 2008, however, if the policy does not renew before 1 July 2008 ASIC does not require compliance by this date. ASIC does however expect AFS licensees to take reasonable steps to comply as soon as possible after 1 July 2008 but by no later than 31 December 2008.

Minimum Standards - Section D

There are five minimum requirements which ASIC requires for a professional indemnity insurance policy during the two year implementation period:

  1. Authorised insurer – From 1 July 2008 the insurance must be provided by an insurer regulated by APRA or operating under an exemption under the Insurance Act 1973 (Cth). This is discussed in the article entitled "Regulation of Direct Offshore Foreign Insurers – further developments".
  2. Amount of cover – ASIC expects that there will be a limit of indemnity of at least AU$2 million or higher based on revenue (as defined). For licensees with total revenue from financial services provided to retail clients greater than AU$2 million, minimum cover should be approximately equal to actual or expected revenue (up to a maximum limit of AU$20 million). A higher limit may be necessary and each licensee must assess their limits, including on the basis of a reasonable estimate of retail clients' potential losses, potential claims brought within an external dispute resolution scheme (EDR scheme) or in the Courts and whether the business carries a higher risk of claims. Records of this assessment must be retained. RG 126 also provides that: (a) the insurance must have at least one automatic reinstatement unless the limit of indemnity is at least twice the minimum limit referred to above; and (b) defence costs must be in addition to the minimum limit or the level of cover must be sufficiently increased to take into account these costs.
  3. Scope of cover – The professional indemnity policy must indemnify the licensee against liability for loss or damage suffered by retail clients because of breaches of Chapter 7 of the Corporations Act by the licensee or its representative. This includes liability for fraud or dishonesty by directors, employees and other representatives of the licensee and liability under an EDR scheme.
  4. Terms and exclusions – A number of matters should not be excluded including EDR scheme awards, fraud and dishonesty by directors, employees and other representatives and claims arising from incidents that have been notified to ASIC.
  5. Excess / deductibles – The excess must be at a level the business can confidently sustain as an uninsured loss. Again the AFS licensee must maintain records of this assessment.

Requirements after implementation period - Section C

Section C of RG 126 sets out a higher standard of cover which needs to be implemented by 1 January 2010, including having run-off cover and coverage for items not an "approved product list". Section C will be examined in our next bulletin.


The main purpose of RG126 is to protect retail clients. It therefore has the most impact on small to mid-sized AFS licensees with the larger businesses dealing primarily with wholesale clients.

Interested parties have worked closely with ASIC to formulate RG126. Although there are still some teething problems, reports from the market suggest that, at least for the Section D requirements, insurers and insureds alike are working together to implement the changes required. What has been common is that RG126 endorsements or extensions are being provided to ensure that all aspects of RG126 are covered.

It should be kept in mind that licensees can apply to ASIC for approval of 'alternative arrangements' in which case they would need to address a number of issues including how the arrangements meet the criteria for assessing adequate professional indemnity insurance. ASIC may ask for an expert report to support the application.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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