The recent collapse of super funds First Guardian and Shield has sent shockwaves through Australia’s financial services and insurance sectors, resulting in over $1 billion in lost retirement savings for thousands of Australians. These events have exposed critical weaknesses in compliance and oversight across financial advisers, licensees, research houses and superannuation trustees - and serve as a stark reminder to financial institutions, their brokers and insurers of the complex and evolving risks inherent in the sector.
Two financial institutions (FI) insurance solutions designed to address these risks are affirmative remediation cover and coverage for exposures arising from design and distribution obligations (DDO).
The watershed moment for the industry was the banking royal commission. The commission’s findings, reported in 2019, led to sweeping legislative reforms and a new era of regulatory scrutiny that’s still unfolding.
“That was a real turning point,” said Simon Jenvey (pictured), financial institutions portfolio manager for Liberty Australia. “In the last seven years or so a lot of new legislation has been introduced to reform poor behaviours in financial institutions.”
One of the most significant insurance responses to these reforms has been the introduction of affirmative remediation cover. Major insurers in the FI space - including Chubb, AIG and Liberty - have updated their policy wordings in recent years to include or clarify this coverage, often as a direct response to market demand and regulatory pressure.
“The most innovative change in cover is the introduction of affirmative remediation cover,” said Jenvey, “It's quite nuanced and technical, however subsequent class actions after the Royal Commission resulted because of breaches that financial institutions were aware of but where they didn't remediate the losses.”
Historically, there was a gap in these policies where the obligations of the legislation required remediation, but a typical professional indemnity or financial institutions policy only triggers from a ‘claim from a third party’.
“Insurers are well within their policy rights to exclude where a ‘claim’ does not exist,” he said. “The market's current solutions have been piecemeal at best, and we’ve seen a number of declinatures.”
Liberty’s new FI policy, Jenvey explained, seeks to address this.
“So that's what we've brought in Liberty’s new financial institutions policy - where the insured has identified a breach, where there is a customer loss and when it hits a certain threshold and there's a statutory obligation to remediate - that's when the policy will trigger – in line with their legal obligations,” he said.
Another major reform has been the introduction of Design and Distribution Obligations (DDO).
“The design and distribution obligations brought in off the back of the Royal Commission are reforms to ensure that products are designed, created and then distributed for appropriate target markets,” said Jenvey. “It was really about matching the product to the right person.”
When the regulator ASIC decides that this hasn’t happened, they have the power to freeze the product.
Liberty, along with other FI insurers, has responded by including cover for the costs associated with regulatory hearings, product rectification and public relations in the event of a stop interim order.
“So we've responded by putting in some costs and expenses associated with covering the costs of the hearing, the costs for rectification of those products, and also because it's such a public forum, public relations costs associated with a stop interim order,” said Jenvey.
The First Guardian and Shield collapses highlight how, although insurance claims from financial institutions are rare, they tend to be highly complex and costly. Jenvey said that brokers should bear in mind that not all FI insurance policies or claims services are created equal and mishandling a claim can lead to serious financial and reputational consequences for everyone involved.
“I think it's a timely reminder that you want to have confidence in the product that you're giving to your clients - because when a claim does happen, there's significant legal costs involved,” he said.
