Charmian Holmes

Businesses (and their insurance brokers) waiting with bated breath for new model proportionate liability laws may be sorely disappointed.

The basic principle of proportionate liability is that it enables responsibility for a damages claim to be allocated according to the degree to which each wrongdoer’s actions contributed to the loss.

Proportionate liability legislation was seen as the solution to spiralling premiums for liability insurance. While this might be working for insurers, small businesses remain exposed and the model laws will not provide a universal panacea.

No ‘Contracting Out’ for Lower Value Contracts

A single model law which bans contracting out of proportionate liability could reduce the likelihood of bigger businesses transferring risk to smaller business.

Contracting out of proportionate liability has been a problem area because it usually improves a principal’s legal position but means the other (smaller) party carries more contract risk (including liability for the principal’s negligence).

Parties are deemed to have contracted out, if the indemnity clauses in the contract do not allow liability of each party to be apportioned according to fault.

Currently if the governing law of the contract is:

• NSW, WA and Tasmania, you can agree to contract out.
• SA, ACT, NT, Victoria and the Commonwealth, the position is uncertain.
• QLD, it is unlawful to contract out.

The proposed model laws will at least provide consistency across Australia by prohibitingcontracting out for contracts with a value of either $10m or $5m (the exact amount hasn’t been decided yet). A significant benefit for small business!

Indemnities will still be allowed

Larger businesses have been concerned that proportionate liability laws interfere with the operation of contractual indemnities. For example, where one wrongdoer agrees to indemnify another wrongdoer for their proportionate share of a third party damages claim.

Currently:

It is unlawful to seek contribution or indemnity from a concurrent wrongdoer in NSW, ACT, QLD, VIC, and the Commonwealth.
It is permitted in NT, Tasmania, WA and SA.
The model laws will allow contribution and indemnities between wrongdoers and this is particularly disappointing for smaller businesses.

Allowing this, makes the ban on contracting out of proportionate liability meaningless because in most cases, it will be the smaller party that will have to bear all the liability.

If they agree to this, it will invalidate their insurance because their contractual liability will differ from their proportionate liability.
If they don’t agree, they risk losing the business.
It’s common knowledge that assuming liability under a contract which differs from the insured’s common law liability will trigger the contractual liability exclusion in PI and public liability policies, leaving the policyholder unprotected.

This exposure can be minimised by obtaining good quality cover for principal’s liability within a public liability policy. Unfortunately there is no way of doing this for PI insurance because principal’s liability cover is not available for that type of insurance.

Arbitration and Binding Determinations Exempt

Another surprising development is that proportionate liability will not apply to alternative dispute resolution unless the parties expressly agree in the contract.

Who knows why this is considered a good idea! But from now on, if you want alternative dispute resolution processes like mediation or arbitration to apportion liability, ensure you stipulate this in the contract.

For those whose actions could be judged by an external dispute resolution body like the Financial Ombudsman Service, it seems extremely unfair that a dispute could be dealt with differently to court proceedings – especially when one party is legally required to submit client disputes to that body and has no influence over its terms of reference.

When will the changes commence?

It is not clear when the model laws will start. We predict that it will be a long process, as each state and territory will have to amend their laws to align with the proposed model.

What is clear though, is that contracting parties will still need legal advice on how the contracts they sign interact with their insurance program – including indemnities, insurance obligations, warranties, guarantees, performance obligations and dispute resolution clauses.

There isn’t always a quick fix to the issues of contract risk allocation, but understanding where the exposures lie and what is covered by insurance, will help you and your clients to make an informed assessment.

The Fold’s Contract Review Services helps insurance brokers and their clients to identify areas of contractual liability and exposures that may not be covered by their insurance program. Get in touch for personalised advice.

By Charmian Holmes www.thefold.com.au

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Lesley Thorne

Six different ‘wholesale client’ tests and three different ‘sophisticated investor’ tests currently apply to financial services clients and deciding whether self-managed superannuation fund (SMSF) trustees are wholesale or retail is fraught with difficulty according to The Fold Legal (The Fold).

“Get it wrong and advisers may breach the law,” says The Fold’s Senior Lawyer, Lesley Thorne.

While clients who are provided with financial services that relate to superannuation or retirement savings account (RSA) products are considered retail clients, there are some ifs, buts, maybes and considerable controversy about how the tests apply to SMSFs.

“Generally speaking, when a financial service that ‘relates to’ superannuation products is provided to an SMSF trustee, the trustee can generally only be treated as a wholesale client if the fund has assets of more than $10 million,” Ms Thorne says.

But even if the SMSF has less than $10 million in assets, in some circumstances, product providers can treat it as a wholesale client.

“If an SMSF has less than $10 million in assets but meets one of the wholesale client tests, it’s a question of control,” Ms Thorne says  “If the SMSF or someone who controls it meets one of the tests, product providers can treat the fund as a wholesale client when providing or issuing a financial product (although not a superannuation product).”

However, any one who provides any other financial service to the SMSF – for example, advice about the financial product or arranging for its acquisition – must treat the SMSF and its trustees as a retail client.

Ms Thorne warns that the question of who “controls” an SMSF is not straightforward because of the way that SMSFs are structured.

“If an SMSF has more than one member and trustee, the trustees must retain control and act in the interests of all members. This means that no one trustee controls the fund – and even a product provider cannot issue a product to such an SMSF as a wholesale client,” she says. “ Only a sole SMSF member who is also sole director and shareholder of its corporate trustee can be said to control an SMSF.

Ms Thorne says different views on the wholesale client tests are being relied on around the industry leading to an uneven playing field. “Our recommendation is, if you’re not sure, get specialist advice.”

The Fold has recently published a white paper Sophisticated, Wholesale … or Just Plain Retail? which comprehensively demystifies the wholesale client and sophisticated investor tests  – including their application to SMSFs.

To purchase the paper,  visit The Fold website.

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Continual reviewing of PI removes risk of under insurance.

Insurance brokers who are advising their corporate/commercial clients once a year have to pick up their act to avoid unwanted Professional Indemnity (PI) claims, according to Charmian Holmes, Solicitor Director of The Fold.

“The end of financial year can be a risky time for insurance brokers who are advising commercial and corporate clients, as many brokers take over new accounts or have a large number of policies due for renewal,” Ms Holmes said. “Brokers should therefore explain uninsured risk exposures throughout the year when talking to their clients and present them with a range of options for their insurance program.”

Ms Holmes said by communicating with clients at least twice a year, brokers can make sure their clients are covered for new business activities commenced during the year.

“Brokers should always re-evaluate new clients, in case the previous broker has ‘dropped the ball’ and something important has been missed by the last broker,” she said. “It is very important to make sure the client’s insurance program is suitable for their business needs and other activities. Sometimes during the busy June renewal season there isn’t enough time to do this, so brokers should review in the months after the end of June.”

Checking the fundamentals of the client’s position sounds basic, but Ms Holmes said brokers need to be confident they have correctly identified business needs and other risks to ensure the policy is properly suited.

“Once the fundamentals of the client’s business are understood, brokers should explain what risks can’t be insured so the client understands what is reasonably available in the market and the limitations of their insurance program,” she said.

Having a conversation with the client about the terms of the policy is crucial.

“The client needs to know how the policy operates to make informed decisions about the adequacy of the cover and how to manage risks that can’t be insured,” Ms Holmes said. “If the exclusions in the client’s policies significantly limit the coverage for their business and you can’t get additional cover, explain this to the client and put it in writing so it is on the record.”

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Claire Wivell Plater

As the start of the Future of Financial Advice (FoFA) reforms races towards us at headlong speed, there is an upswing in the number of advisers working on changes to their systems and processes to accommodate their new obligations, according to Claire Wivell Plater, Managing Director of The Fold.

“We’re seeing a real willingness to embrace the changes and get on with business,” said Ms Wivell Plater. “It’s very encouraging.”

That said, Ms Wivell Plater said advisers do need to be careful that what they are doing is technically accurate and therefore should not be relying on word of mouth interpretations of the new requirements.

“Unfortunately, while there is lots of information about the reforms out in the market place, there’s also a lot of non technical opinion and interpretation,” Ms Wivell Plater said. “Advisers need to be sure that the changes they are making actually comply with the letter of the law.

” To meet this need, The Fold has transformed its popular FoFA White Papers into online courses which cover off each component of the reforms. Each course carries continuing professional development (CPD) points and can be accessed via desktop computers and mobile devices such as iPad and iPhone.

“The courses are written in the engaging style for which The Fold is renowned and cover every element of the reform,” Ms Wivell Plater said. “They contain lots of real life scenarios and are liberally sprinkled with plenty of humour to help advisers understand how the reforms apply to their activities.”

Participants can also download a copy of the related Everything They Need to Know White Papers which succinctly summarise the requirements and provide an indispensable implementation guide.

First cab off the rank is Fee Disclosure, Opt In and Client Engagement. After completing this course, advisers and their staff will be able to properly:

• Explain what an ongoing fee arrangement is
• Understand to whom the Fee Disclosure and Opt-in requirements apply
• Know what must be included in a Fee Disclosure Statement
• Manage the timing and provision of Fee Disclosure Statements
• Understand the implications of not complying with the Fee Disclosure and Opt-in requirements
• Understand the importance of Engagement Letters and the role they play in helping you comply with the Fee Disclosure and Opt In requirements

The Fold will launch their online Conflicted Remuneration course and Best Interests Duty courses shortly.

The post The Fold: Helping Advisers Get on with FoFA Business appeared first on AdviserVoice.

“Many businesses panic when ASIC serves them with a notice,” Hillary said. “A smarter strategy may be to put themselves in ASIC’s shoes and work with them to resolve the issue. Businesses shouldn’t underestimate how helpful the regulator can be if approached the right way.”

The Fold recently released When to Hold and When to Fold, a White Paper designed to help financial services businesses on the receiving end of an ASIC notice.

 “The first thing businesses need to do when served with a notice, is to keep calm and not panic,” Hillary said. “Then they need to start preparing for investigation. This involves finding out who they are dealing with – there are many different sections in ASIC and they will each have a different approach.”

Businesses then need to revisit their business strategy to remind themselves of their goals, objectives and the needs of their clients, before looking at what the actual issue is.

“We recommend businesses do a triage and look at the conduct or product that is at issue,” Hillary said. “It may be something that can be remedied relatively easily, for example by putting together a robust compliance plan that includes communicating with clients.”

At various stages along the way, if a business needs legal advice, Hillary suggests engaging a commercial lawyer rather than a litigator.

“Lawyers bring an extra set of eyes to the business and can also help to set out and prioritise the issues, review processes and assist with strategy,” she said. “However, litigators can be quite aggressive and adversarial and may not be well-suited to meeting with the regulator if they are not trying to resolve the issues, but want to fight on. 

“Commercial lawyers, on the other hand, seek common ground upon which to forge a deal that both parties can live with.  This style is better-suited for a frank discussion with the regulator.”

Hillary also recommends self-reporting any potential regulatory issues. “ASIC does not expect every business to exist without a breach, however, they like proactive stakeholders who deal with breaches as manageable occurrences,” she said. “If in doubt, report it!”

Taking a partnering approach with the regulator can also help businesses with the release of new products, according to Hillary.

“Discussing the new product with the regulator can not only iron out any potential breach, but will also educate the regulator on the direction of products, technology and software,” she said.

Hillary joined The Fold in December 2012 after working with ASIC for seven years.

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Claire Wivell Plater, Managing Director of The Fold, says the problem with asset based fees is that they incentivise advisers to recommend strategies and products that maximise the assets they manage for the client.

Under the Best Interests Duty, clients must be given non-product-related solutions where appropriate, even if that means the client is less likely to need future advice.

“The new Conflicts Priority Rule means that advisers cannot recommend strategies or products that create extra revenue for themselves or their licensees unless they can demonstrate additional benefit for the client,” she said.

“If they are not actually managing the clients’ assets or where an asset-based fee would not adequately remunerate them, they need a fee structure that remunerates them for the work they do. Advisers also cannot over-service a client to create more remuneration for themselves.”

Ms Wivell expects a trend away from 100% asset-based fee structures to fees that are based on the work done for the client, or a combination. “While the Government is not banning asset-based fees outright, they are making it increasingly inappropriate to charge them,” she said.

Ms Wivell Plater likened the rule to the Government’s current anti-smoking legislation.

“Smoking is not actually banned, but federal and new state legislation make it difficult to smoke anywhere. New anti-smoking legislation introduced this month in NSW, for example, bans smoking in places like transport stops and entrances to NSW public buildings.

“It’s similar to the legislation surrounding asset-based fees. Advisers aren’t specifically banned from charging them – but if they do, they risk either falling foul of the Conflicts Priority Rule or not being adequately remunerated for their work.”

Ms Wivell Plater said many advisers will need to rethink how they charge for their services and this is likely to present a big challenge.

“Setting up an engagement process is key to complying with the new law,” she said.

“Advisers need to understand how to define the terms of engagement from the moment they first meet with a client.  If the service proposition and the client’s fee commitment are clear from the minute the client walks in the door, the financial aspects of client relationships become easier to manage.”

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These are some of the issues The Fold Legal (The Fold) team tackle on the Frankology blog on their newly-launched website – www.thefoldlegal.com.au

“Frankology will host our frank takes on issues which affect the financial services industry,” says Managing Director of The Fold, Claire Wivell Plater.

“We believe the industry needs some straight talking on topics that will affect the daily operation of financial services businesses and we are not afraid to tell it how we think it is.”

The Fold helps financial services firms of all sizes manage their legal, regulatory and commercial challenges at every stage of the business life cycle – from start up to expansion to sale. They’ve worked with businesses in the general insurance, financial planning, funds management, credit, accounting and carbon spaces.

“The idea for Frankology was born following some curly questions put to us by our clients,” Ms Wivell Plater says. “We realised that following FOFA, MySuper and the many other imminent legislative changes facing the industry, many people would be asking similar types of questions and would want straight answers. So straight answers is what we will be giving them.”

On the issue of volume bonuses, The Fold was asked….
A colleague of mine has been told by their AFSL that they will no longer pass on volume payments to the rep. They claim this is due to best interest duties. I can’t see how the AFSL holding volume payments assists best interest. Does this seem right or is the AFSL using it as an excuse to retain more funds?

On the issue of Codes of Practice, The Fold was asked in what circumstances an opt-out arrangement might be acceptable to ASIC in a Code of Practice.

The Fold’s opinion on these two issues are available in the Frankology section of The Fold’s new website – http://www.thefoldlegal.com.au/frankology

The Fold’s website is also home to a range of regulatory and compliance products which will soon feature in an online store. Also coming soon are a KnowHow section that will host white papers and articles on financial planning and business issues and online CPD for financial advisers.

“Our mission in life is to take away the fear factor of legislation and regulation for financial services businesses,” Ms Wivell Plater said.  “Keeping up-to-date is exhausting – we want to make it easy. And our new website is just one of the ways we are doing that.”

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