Since 2002, the Government has been considering how retail clients who incur losses caused by the negligent advice or misconduct of financial services licensees should be compensated.

Section 912B of the Corporations Act 2001 requires that financial services licensees providing a financial service to retail clients must have certain arrangements in place to ensure that persons who successfully claim for losses suffered due to breaches of the licensee’s obligations will be paid their claims. Commencement of section 912B has been deferred until 1 January 2007 to enable consultation on the details of the required arrangements.

Treasury has now released a draft regulation, impact statement and explanatory commentary for comment by 30 November 2006. It is intended that the new requirements commence by 1 January 2007.

The draft regulation is designed to:
• prescribe adequate professional indemnity insurance as the required compensation arrangement under section 912B (subject to ASIC approving alternative compensation arrangements);
• prescribe the factors to take into consideration when determining what type of insurance cover is adequate;
• require licensees to note their professional indemnity cover in their Financial Services Guide;
• prescribe factors that ASIC must take into account before approving alternative arrangements to professional indemnity cover; and
• exempt certain licensees (prudentially supervised institutions and certain related entities) from the requirements.

The intention is not to guarantee that all retail claims will be met in all circumstances but it will be expected that licensees will ensure that their insurance cover is sufficient to cover all potential compensation claims under external dispute resolution schemes in which they participate.

Although it is intended that the new requirements commence by 1 January 2007, the Government and ASIC are still considering the transitional arrangements that may be needed.