Professional indemnity insurance requirements for AFS licensees

Professional indemnity (PI) insurance is an important part of the regulatory framework for Australian financial services (AFS) licensees providing financial services to retail clients.

ASIC recently brought the issue back into focus through surveillance of financial advice licensees that appeared, based on information reported to ASIC, to hold less than the minimum level of PI insurance expected under Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126). While most of the licensees identified had adequate cover but had incorrectly reported it to ASIC, one licensee was found to have inadequate insurance.

The broader issue for AFS licensees is that it is not enough simply to hold a current PI policy. The amount, scope and terms of the cover need to be appropriate for the business being conducted.

When is PI insurance required?

Section 912B of the Corporations Act 2001 requires an AFS licensee that provides financial services to retail clients to have arrangements for compensating those clients for loss or damage arising from certain breaches of the financial services laws by the licensee or its representatives.

For most licensees, this means maintaining adequate PI insurance. ASIC’s expectations about what constitutes adequate cover are set out in RG 126.

Certain types of licensees are also subject to specific PI insurance requirements in addition to the general framework, including responsible entities of registered managed investment schemes, corporate directors of retail CCIVs, IDPS operators and MDA providers.

How much cover is enough?

ASIC generally expects an AFS licensee with total revenue from financial services provided to retail clients of $2 million or less to hold at least $2 million in PI cover for any one claim and $2 million in aggregate.

Where retail financial services revenue exceeds $2 million, ASIC expects the minimum level of cover to be approximately equal to the licensee’s actual or expected retail financial services revenue, up to $20 million.

Revenue earned by authorised representatives from providing financial services to retail clients also needs to be included when determining the relevant revenue amount.

The appropriate level of cover also depends on the nature and scale of the licensee’s business, including the financial services and products provided, the number and type of clients and representatives, the potential size and number of claims and the licensee’s overall risk profile.

A licensee with less than $2 million in retail financial services revenue may therefore still require more than $2 million in cover.

The policy terms matter as much as the limit

The headline amount of cover is only one part of the assessment. When reviewing a policy, licensees should look beyond the headline limit and check matters including:

• cover for the conduct of the licensee and its representatives;
• appropriate fraud and dishonesty cover;
• cover for AFCA awards;
• appropriate retroactive cover;
• adequate reinstatement of the policy limit;
• an excess that the licensee has sufficient financial resources to meet; and
• appropriate treatment of defence costs.

The exclusions under the policy also need to be considered against the financial services actually provided by the licensee. For example, a policy may provide a $2 million limit but still be inadequate if an exclusion removes cover for an important part of the licensee’s business.

For this reason, a certificate of currency will not always provide enough information to determine whether the arrangements are adequate. Licensees should understand the relevant policy wording and clarify any uncertainty with their broker or insurer.

Licensees should also check that the insured business description continues to match the activities actually undertaken. This is particularly important following an AFS licence variation, the addition of new financial products or services, or another material change to the business.

Group policies require closer consideration

Some AFS licensees are insured under a group policy together with related entities.

Where this occurs, the licensee should understand which entities are insured, whether the limit is shared and whether claims involving another insured entity could reduce the cover available to the AFS licensee.

In our experience, ASIC has specifically queried whether policies provide individual or group cover when assessing PI information provided as part of an AFS licence application.

Representatives and separate PI cover

Licensees also need to consider how the conduct of their representatives is insured.

The licensee’s arrangements need to take account of all representatives, not only authorised representatives.

A representative may maintain separate PI insurance rather than being covered directly under the licensee’s policy. Where this occurs, the licensee should consider whether:

• the representative’s policy covers the financial services it provides under the licensee’s AFS licence;
• the level and terms of cover are adequate;
• the authorised representative agreement requires the representative to maintain that cover throughout its appointment; and
• the licensee has an appropriate contractual right of indemnity.

The licensee should also have a process for confirming that the cover remains current. This is particularly relevant for licensees operating corporate authorised representative models. Requiring a representative to ‘hold PI insurance’ in an agreement is not, by itself, enough if the policy does not provide appropriate cover for the authorised activities.

Licensees should also consider the policy excess, treatment of defence costs and reinstatement of the policy limit. These features can materially affect the cover actually available when a claim occurs, particularly where the excess is significant or defence costs reduce the amount available to meet claims.

Do not overlook the retroactive date

PI insurance generally operates on a claims-made basis, meaning a claim made during the current policy period may relate to conduct that occurred years earlier.

The retroactive date therefore requires particular attention when a licensee changes insurer or policy.

If the retroactive date under a new policy does not appropriately preserve cover for earlier conduct, the change may create an unintended gap in insurance.

New AFS licence applicants

PI insurance also commonly arises in the final stages of a retail AFS licence application. In matters we have acted on, ASIC has required applicants to provide information about the insured, policy limits, excess, reinstatements, business covered and relevant fraud cover.

Applicants should ensure this information is checked against the actual policy rather than relying only on the certificate of currency.

PI insurance needs to be reviewed as the business changes

Licensees should reconsider their PI arrangements where there is a material change to the business, including where they vary their AFS licence, add new products or services, appoint new authorised representatives, experience significant growth or change insurer or policy structure.

Licensees should also keep a record of their review and the basis on which they concluded that the cover remains adequate.

A practical PI review

When reviewing PI arrangements, we suggest licensees confirm:

• the correct AFS licensee is named as an insured;
• the insured business description reflects the services and products currently provided;
• the any-one-claim and aggregate limits remain appropriate;
• all relevant representatives are appropriately covered;
• any separate representative policies and contractual indemnities remain effective;
• any group policy provides sufficient cover for the licensee;
• the licensee has sufficient financial resources to meet the excess;
• defence costs do not inappropriately erode the required cover;
• the required reinstatement is available;
• the excess, defence costs and reinstatement arrangements are appropriate;
• the retroactive date preserves appropriate historical cover;
• exclusions do not materially undermine the required cover; and
• information provided to ASIC accurately reflects the insurance actually held.

ASIC’s recent surveillance is a useful reminder of the final point. Since 2025, PI insurance information has been collected through the annual FS70 financial statement lodgement. In ASIC’s recent review, most of the licensees identified actually held sufficient insurance but had incorrectly reported their cover. Licensees should therefore check the PI information included in their regulatory lodgements against the current policy before submission.

If you require assistance with your PI requirements, please contact Chris Mee at cmee@cnmlegal.com.au or Alanah McAliece at amcaliece@cnmlegal.com.au or call 07 3211 4010.

CNM Legal is also involved in organising an ICCMF Brisbane event on 22 October 2026 focused on PI insurance requirements and practical considerations for AFS licensees. The event will also be available to attend online. If you would like further details about the event, please contact us to be included on our invitation list.

This paper is produced as general information in summary for clients and should not be relied upon as a substitute for detailed legal advice or as a basis for formulating business or other decisions. CNM Legal asserts copyright over the contents of this document.