ASIC issues compensation and insurance requirements for AFS licensees

ASIC has released a new regulatory guide, Regulatory Guide 126: Compensation and insurance arrangements for AFS licensees (RG 126).

RG 126 outlines ASIC’s policy for administering the
new compensation and professional indemnity (PI) insurance requirements
for Australian financial services (AFS) licensees who provide financial
services to retail clients. These requirements are set out in
7.6.02AAA of the Corporations Regulations 2001 and
s912B of the
Corporations Act 2001. 

The compensation and PI insurance requirements aim
to reduce the risk a licensee might not have sufficient financial
resources to compensate retail clients for losses they suffer as a
result of a licensee breaching the law.

has adopted a two-stage approach to administering the new rules:

1. ASIC will initially require licensees to have PI
insurance based on what is commercially available in the market now,
but has also set minimum standards to deliver some practical results
for consumers. It will be enough for licensees to meet these minimum
standards for two years after the requirements commence.

2. At the end of the two-year implementation period (1 January 2010),
ASIC expects licensees to have a higher standard of PI insurance. It
will work with industry to encourage the development of products or
solutions that achieve this higher standard during the implementation

Licensees with an AFS licence that commenced before
1 January 2008 must have stage 1 insurance in place by 1 July 2008. Those with
a new AFS licence commencing on or after 1 January 2008 need to meet
the stage 1 compensation requirements from the date their licence commences.

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