Explanatory Paper
TPB(EP) 05/2014

Professional indemnity insurance requirements for tax (financial) advisers

This explanatory paper is also available as a PDF – TPB(EP) 05/2014 Professional indemnity insurance requirements for tax (financial) advisers (661 KB)


This TPB explanatory paper (TPB(EP)) is intended as information only. It provides a detailed explanation of the TPB’s professional indemnity (PI) insurance requirements for tax (financial) advisers. Further, this TPB(EP) explains the TPB’s interpretation of the provisions in the Tax Agent Services Act 2009 (TASA) relating to the PI insurance requirements, translating these provisions into practical principles that can be applied by the profession.

Currency of details of the PI insurance requirement
The TPB’s PI insurance requirements for tax (financial) advisers will commence from 1 July 2014. The TPB intends to review the details of its PI insurance requirements five years after the finalisation of the TPB’s revised requirements, with a view to making any necessary refinements for the future. However, the TPB reserves the right to amend the requirements at any point before any formal review if it becomes necessary.

Key terms
There is a table at the end of the document which lists a number of key terms and the meaning they have in this document.

Document history
The TPB released this document as a draft explanatory paper in the form of an exposure draft on 7 March 2014. The TPB invited comments and submissions in relation to the information in it. The closing date for submissions was 16 April 2014. The TPB considered the submissions made and now publishes the following TPB(EP).


Issued: 30 June 2014

Last modified: 27 October 2014

 

Overview

The requirement to maintain professional indemnity (PI) insurance that meets the TPB’s requirements

Section 20-5 of the Tax Agent Services Act 2009 (TASA) provides an eligibility requirement for registration and renewal of registration that applicants ‘maintain, or will be able to maintain, PI insurance that meets the Board’s requirements’. The TASA provides that:

Paragraph 20-5(1)(c)

the individual maintains, or will be able to maintain, professional indemnity insurance that meets the Board’s requirements

Paragraph 20-5(2)(d)

the partnership maintains, or will be able to maintain, professional indemnity insurance that meets the Board’s requirements.

Paragraph 20-5(3)(e)

the company maintains, or will be able to maintain, professional indemnity insurance that meets the Board’s requirements.

Furthermore, subsection 30-10(13) of the Code of Professional Conduct (Code) in the TASA provides:

You must maintain professional indemnity insurance that meets the Board’s requirements.



Summary of the TPB’s PI insurance requirements

The TPB’s PI insurance requirements are outlined in this document. The TPB notes that:

  • The primary purpose of the TPB’s PI insurance requirements is to ensure tax (financial) advisers that are registered with the TPB have PI insurance that meets the TPB’s requirements for the tax (financial) advice services they provide.

  • In determining the TPB’s PI insurance requirements, the TPB has given detailed consideration to the compensation requirements imposed on Australian Financial Services (AFS) licensees by the Australian Securities and Investments Commission (ASIC). In doing so, the TPB has, wherever possible, adopted a significant number of ASIC requirements to avoid duplication. However, there are two key differences between the TPB and ASIC’s requirements:

    • The TPB requires PI insurance coverage to include tax advice. ASIC’s requirements do not extend to tax advice.
    • The PI insurance requirements under the TASA apply to all entities that are registered with the TPB, not just to AFS licensees.
  • The TPB understands that generally AFS licensees are required to have adequate compensation arrangements (which is generally PI insurance cover) under section 912B of the Corporations Act 2001. However, the TPB considers that an extension of the existing PI insurance held by AFS licensees who are tax (financial) advisers, so that the PI insurance held covers the provision of tax advice, will generally meet the TPB’s minimum requirements. Accordingly, provided that such PI insurance cover also covers the provision of tax advice, the tax (financial) adviser does not need to have a separate policy or multiple policies to meet the TPB’s requirements.

  • Further, the TPB will approve certain self-insurance arrangements[1] as PI insurance that meets its requirements, in a manner consistent with that adopted by ASIC.

  • The TPB specifically considered the application of its PI insurance requirements to tax (financial) advisers who derive a low turnover. Turnover means the total amount of fees from the provision of services, excluding GST. The TPB considers that it is important for consumer protection that tax (financial) advisers maintain adequate PI insurance cover that covers the provision of tax (financial) advice services to clients, regardless of turnover.[2]

  • Tax (financial) advisers who do not provide tax (financial) advice services for a fee or other reward are not required to have PI insurance cover in order to meet the TPB’s PI insurance requirements.

  • In relation to charging or receiving a fee for providing tax (financial) advice services, a tax (financial) advice service is taken to be provided for a fee even if the fee for the service is bundled with other fees for other services (for example, financial planning services or advice).

  • Tax (financial) advisers who only receive an honorarium (or honorary reward) for tax (financial) advice services will not be required to have PI insurance in order to meet the TPB’s requirements.[3]

  • A tax (financial) adviser will meet the TPB’s PI insurance requirements if they do not hold their own PI insurance policy but they are adequately covered under a policy held by another registered tax (financial) adviser entity.

  • If an employee is providing in-house tax (financial) advice services to their employer, the employee will not be required to have PI insurance in order to meet the TPB’s requirements.

  • It is important to note that TPB’s PI insurance requirements in no way affect or modify an AFS licensee’s or authorised representative’s requirements to have adequate compensation arrangements in place for the purposes of their licensing with ASIC.

  • The TPB also understands that AFS licensees are required to have internal dispute resolution (IDR) procedures and to be members of an ASIC-approved external dispute resolution (EDR) scheme, under the Corporations Act 2001. The TPB’s regulatory function does not seek to replicate or duplicate the requirements relating to IDR and EDR, nor does it apply independently from the dispute resolution processes in the Corporations Act 2001.


Implementation arrangements

The TPB’s objective

The TPB will administer the PI insurance requirement to maximise its potential to achieve the policy objective.

The PI insurance requirement will improve the standard of compensation arrangements in place in the profession by establishing a general requirement for PI insurance cover for all registered tax (financial) advisers.


The TPB’s approach to implementation

To achieve its objective, the TPB will take a staged approach to administering these requirements, including a period of implementation. This is because when any new regulatory requirement is introduced, there will necessarily need to be a period of adjustment. The TPB understands that insurance policies are generally written for one year periods. Time will be required for existing policies to lapse and new policies or products to be developed and agreed upon.


Table 1: Staged approach

PI Insurance implementation period

1 July 2014 – 31 December 2016

Pi insurance long-term requirements

From 1 January 2017

  • Any new policies taken out by tax (financial) advisers who are subject to the TPB’s PI insurance requirement must meet the TPB’s requirements.

  • If a tax (financial) adviser has a current PI insurance policy that does not meet the TPB’s requirements, the policy can continue during the implementation period. However, upon lapse of that policy or by 1 January 2017, whichever occurs first, a tax (financial) adviser must obtain a policy that complies with the TPB’s requirements.

By 1 January 2017 all tax (financial) advisers who are required to have PI insurance cover must have PI insurance cover that complies with the TPB’s requirements.

 

What this means for tax (financial) advisers

Upon commencement of the implementation period, which is 1 July 2014, if a tax (financial) adviser already has PI insurance cover, they may maintain that cover until the end date of the policy. After the current policy lapses, the tax (financial) adviser will then need to obtain PI insurance cover that meets the TPB’s requirements, in preparation for the long-term requirement.

Any registered tax (financial) adviser who is obtaining PI insurance cover (for the first time or renewing their policy) during the period of 1 July 2014 to 31 December 2016 (implementation period) will be required to obtain PI insurance cover that meets the TPB’s requirements.

Therefore, from the commencement of the TPB’s requirement on 1 July 2014, all registered tax (financial) advisers will be required to have PI insurance cover that meets the TPB’s requirements, unless  their existing policy is continuing during the implementation period.


What this means for consumers of tax (financial) advice services

The approach the TPB has adopted to administering the PI insurance requirement means that all tax (financial) advisers will generally need to have some form of PI insurance coverage from 1 July 2014 in respect of the provision of tax (financial) advice services. As a result,  consumers should have greater protection against losses than they did before the commencement of the PI insurance requirement, to the extent that any tax (financial) advisers may not have had such cover for the tax (financial) advice services being provided.


The legislative framework

What ‘maintain’ means

The TPB will consider a registered tax (financial) adviser who is required to have PI insurance as maintaining PI insurance that meets the TPB’s requirements if:

  • the tax (financial) adviser holds a PI insurance policy that meets the minimum requirements set out in this TPB(EP);

  • the tax (financial) adviser is covered by a PI insurance policy that meets the minimum requirements set out in this TPB(EP), that is held by another tax (financial) adviser; or

  • the tax (financial) adviser has an alternative arrangement that has been approved by the TPB, as described in this TPB(EP).

As noted earlier, if a tax (financial) adviser is covered by existing PI insurance to meet the adequate compensation arrangements obligations under section 912B of the Corporations Act 2001, the tax (financial) adviser will not need a separate PI insurance policy in order to meet the TPB’s requirements, as long as the PI insurance covers the provision of tax advice and otherwise meets the TPB’s minimum requirements.

Further, the TPB understands that generally, an AFS licensee will hold PI insurance that covers their authorised representatives. If a tax (financial) adviser who is an authorised representative does not hold its own PI insurance but is covered by the PI insurance that meets the TPB’s requirements held by an AFS licensee, the authorised representative will meet the TPB’s PI insurance requirements.

What ‘will be able to maintain’ means

The purpose of the wording ‘will be able to maintain’ is to accommodate those new applicants who are applying for registration but who, at the time of applying for registration, do not maintain PI insurance that meets the TPB’s requirements. [4]

The following example illustrates the purpose of the words 'wil be to maintain’: 

Ted aplies to the TPB for registration as a registered tax (financial) adviser. In addition to having to satisfy the TPB that he is a fit and proper person and that he can meet the registration requirements (prescribed by the regulations), Ted will need to satisfy the TPB that he will be able to maintain PI insurance that meets its requirements as soon as he is registered.
Assuming that the TPB grants Ted‘s application and he becomes a registered tax agent, three years later Ted applies to the TPB to renew his registration.
As Ted already has PI insurance, he need only satisfy the TPB that this insurance meets its requirements.

In circumstances where an applicant for registration does not maintain PI insurance that meets the TPB’s requirements at the time of applying for registration and indicates to the TPB that they will be able to maintain PI insurance once registered, the TPB will consider the applicant to meet its PI insurance registration requirement.

If the applicant is granted registration, the TPB will generally require that the now registered tax (financial) adviser provides the TPB with details of how they meet the TPB’s requirements within 14 days from the date that the tax (financial) adviser receives notification that their application for registration has been granted.


What are the TPB’s requirements for tax (financial) advisers who do not receive a fee or other reward?

The TPB understands that some tax (financial) advisers do not receive a fee or other reward for the tax (financial) advice services that they provide, for example:

  • employee tax  (financial) advisers who provide tax (financial) advice on behalf of their employer registered tax (financial) adviser;

  • employee tax (financial) advisers who provide in-house tax (financial) advice services to their employers; or

  • contractor tax (financial) advisers who provide tax (financial) advice services on behalf of another registered tax (financial) adviser.

The TPB will consider employee and contractor registered tax (financial) advisers (as described above) who do not, in their own right, receive a fee or other reward for the tax (financial) advice services that they provide as meeting the TPB’s requirements if they do not hold their own PI insurance policy, but are covered by another registered tax (financial) adviser’s policy.

 

Background: regulation of financial advisers who provide tax advice

The TPB has considered the PI insurance requirements that all tax (financial) advisers will need to meet in order to be eligible for registration under the TASA, and to comply with subsection 30-10(13) of the Code.

In any industry or profession, from time to time, clients might suffer loss due to an act, error or omission by a service provider. In relation to tax (financial) advisers, there needs to be a mechanism to ensure that funds are likely to be available to compensate clients who may suffer loss due to tax (financial) advice services provided by a tax (financial) adviser. 

Paragraph 2.57 of the Explanatory Memorandum to the Tax Laws Amendments (2013 Measures No. 3) Bill 2013 explains the purpose of introducing the PI insurance requirement for tax (financial) advisers:

Certainty and consumer protection would be enhanced under this model, as there is a proposed requirement that financial advisers ensure that their professional indemnity insurance (PI insurance) will cover them not only for the financial advice that they provide, but also for their tax advice.

The TPB has developed the policy objective for its PI insurance requirements (which is set out below) on the basis of the above principle, as far as it relates to the provision of tax advice by tax (financial) advisers.


Policy objective

The TPB’s policy objective is:

The Tax Practitioners Board’s professional indemnity insurance requirements for tax (financial) advisers are to reduce the risk that a client’s losses (due to the provision of tax advice) are not compensated, due to the tax (financial) adviser having inadequate financial resources or for any other reason, as far as this is practically possible.

The policy objective complements the object of the TASA which is to ensure that tax (financial) advice services are provided to the public in accordance with appropriate standards of professional and ethical conduct.[5]

 

The TPB’s PI insurance requirements

 

The TPB’s general approach

The TPB’s objective

The objective of the TPB’s PI insurance requirements is to ensure those entities that are registered with the TPB have adequate PI insurance cover for the tax (financial) advice services they provide.


What this means for tax (financial) advisers registered during the notification period (from 1 July 2014 to 31 December 2015)

The notification period runs from 1 July 2014 to 31 December 2015.

Once an entity is registered during the notification period, the requirement to maintain PI insurance that meets the TPB’s requirements is an ongoing registration requirement, and newly registered tax (financial) advisers will be required to provide the TPB with details of how they meet the TPB’s PI insurance requirements. See the TPB’s implementation approach for further details about how the TPB’s PI insurance requirements will apply during this period.


What this means for tax (financial) advisers registered in the transitional and standard period (from 1 January 2016)

The transitional period runs from 1 January 2016 to 30 June 2017. In order to be eligible for registration under the TASA from 1 January 2016, all applicants (including AFS licensees and representatives[6] must meet the eligibility requirements contained in the TASA, including maintaining, or being able to maintain, PI insurance that meets the TPB’s requirements. 

In order to meet the PI insurance eligibility requirement when applying for registration, an AFS licensee or representative will need to satisfy the TPB that the AFS licensee or representative maintains PI insurance, or that the AFS licensee or representative will be able to maintain PI insurance cover that meets the TPB’s requirements once registered. 

The requirement to maintain PI insurance that meets the TPB’s requirements is an ongoing requirement for tax (financial) advisers, and the TPB may require a tax (financial) adviser to provide a Certficate of Currency or other evidence in relation to their PI insurance at renewal or when requested, to satisfy the TPB that they meet the ongoing PI insurance requirement.


Summary of how the PI insurance requirements will apply

Table 2 provides a summary of how the TPB’s PI insurance requirements will apply during the notification, transitional and standard periods.

Table 2: How the PI insurance requirements will apply

 

Eligibility for registration

Ongoing requirement once registered

Notification period

(registered during 1 July 2014 to 31 December 2015)

Not applicable. There are no PI insurance eligibility requirements for registration.

You must maintain PI insurance that meets our requirements within 14 days from being notified that you are registered, and for the period of your registration.

Note: our requirements during the notification period allow you to be covered by an existing policy until it lapses.

Transitional and Standard period

(apply for registration during 1 January 2016 to 30 June 2017)

You must maintain, or will be able to maintain PI insurance that meets the TPB’s requirements in order to be eligible for registration.

You must maintain PI insurance that meets our requirements within 14 days from being notified that your registration has been granted, and for the period of your registration.

 

What this means for consumers of tax (financial) advisers

It is important to recognise the limitations of PI insurance as a consumer protection mechanism. PI insurance protects consumers indirectly and it is not a guarantee that compensation will in fact be paid. PI insurance protects the tax (financial) adviser against the risk of financial losses arising from acts, errors, omissions and other misconduct by the tax (financial) adviser in the provision of tax (financial) advice services. This might occur where the tax (financial) adviser is otherwise unable or unwilling to compensate a client in respect of a loss caused by the tax (financial) adviser and there is or would be a liability to do so.

The PI insurance cover required by the TPB is not necessarily intended to cover what a client might perceive as a loss in every circumstance.


Providing evidence of PI insurance cover to the TPB

When applying for registration under the TASA, other than during the notification period, tax (financial) advisers will need to satisfy the TPB that they have PI insurance cover that meets the TPB’s requirements, or that they will maintain PI insurance cover that meets the TPB requirements upon becoming registered.

When applying for registration (including renewal of registration) under the TASA during the transitional and standard period, applicants for registration will need to satisfy the TPB that they maintain PI insurance or that they will maintain PI insurance that meets the TPB’s requirements upon becoming registered.

Additionally, tax (financial) advisers will be required on an annual basis to provide the TPB with evidence that they have maintained PI insurance cover that meets the TPB’s requirements.

Further, the TPB may require a tax (financial) adviser to provide a Certificate of Currency in relation to their PI insurance at renewal or when requested. 


If a tax (financial) adviser cannot or does not comply

From 1 January 2016, if an applicant for registration does not satisfy the TPB that they have PI insurance cover that meets the TPB’s requirements, or declare that they will maintain PI insurance cover that meets the TPB’s requirements upon becoming registered under the TASA, the TPB will not grant the applicant registration under the TASA. This is because the applicant will not meet the eligibility requirements.

Once registered, if a tax (financial) adviser fails to maintain PI insurance cover that meets the TPB’s requirements during the period of the tax (financial) adviser’s registration, the TPB may terminate the tax (financial) adviser’s registration on the basis that the tax (financial) adviser ceases to meet a registration requirement[7].

Alternatively, if a tax (financial) adviser fails to maintain PI insurance that meets the TPB’s requirements during the period of their registration, the TPB may sanction the tax (financial) adviser for a breach of the Code under subsection 30-10(13) of the TASA. Depending on the circumstances, the sanctions available to the TPB range from cautions to suspension or termination of a tax (financial) adviser’s registration.


Compliance during the implementation period (1 July 2014 to 31 December 2016)

During the implementation period (1 July 2014 to 31 December 2016), if a tax (financial) adviser already has PI insurance cover, they may maintain that cover until the end date of the policy. After the current policy lapses, the tax (financial) adviser will then need to obtain PI insurance cover that meets the TPB’s requirements, in preparation for complete operation of the requirement.

Any registered tax (financial) advisers who obtain PI insurance cover during or after the implementation period of 1 July 2014 to 31 December 2016 will be required to have PI insurance cover that meets the TPB’s requirements.


Key principles

Table 3 sets out the key principles of the TPB’s PI insurance requirements.


Table 3: Key principles

Principle 1: Fit to achieve the policy objective

Adequate cover is cover that will:
(i) satisfactorily indemnify a tax (financial) adviser against civil liability that may arise in the tax (financial) adviser’s provision of tax (financial) advice services; and
(ii) which meets the policy objective of reducing the risk that client losses are not compensated by the tax (financial) adviser due to the tax (financial) adviser having inadequate financial resources or for any other reason.

Principle 2: Responsibility of tax (financial) adviser to assess adequacy

It is the basic responsibility of each tax (financial) adviser to determine what is ‘adequate’ PI insurance cover for them having regard to the risks that are associated with the provision by them of tax (financial) advice services. Additional insurance cover, to that needed to satisfy TPB obligations, is to be obtained where such additional adequate cover is required.

Principle 3: Practical availability

An element of adequacy is what is practically available at any given time.



Principle 1: Fit to achieve the policy objective

PI insurance is a way of reinforcing a tax (financial) adviser’s ability to meet any client losses caused by an act, error, or omission of the tax (financial) adviser by making funds available to the tax (financial) adviser under the terms of a PI insurance policy. PI insurance protects the tax (financial) adviser against certain risks, and indirectly protects consumers, however it is not a guarantee that compensation will be paid to consumers. PI insurance is an agreement between an insurance company and a tax (financial) adviser; consumers will not be a party to these insurance policies.

The concept of what is ‘adequate’ is an important element of the TPB’s overall requirements for PI insurance for tax (financial) advisers. The TPB will consider what is ‘adequate’ with reference to the minimum requirements, set out in Table 5 of the TPB (EP). For further guidance, see the Adequate PI insurance cover section of this TPB (EP).


Principle 2: Responsibility of tax (financial) adviser to assess adequacy

The TPB considers that compliance with the PI insurance requirement should form part of the tax (financial) adviser’s overall risk management processes.

The TPB accepts that different tax (financial) advisers will have very different businesses and risks, which will impact on what PI insurance arrangements are adequate for them. Therefore, subject to certain minimum requirements of the TPB, the TPB considers that tax (financial) advisers should undertake their own analysis of what is an adequate level of insurance for them.

Minimum PI insurance standards set by ASIC for AFS licensees, as well as other relevant industry and professional bodies, might also provide a guide for tax (financial) advisers in this process. However, compliance with ASIC and/or industry standards will not necessarily mean that a tax (financial) adviser meets the PI insurance requirements of the TPB. The TPB requires an objective assessment of the adequate scope and level of cover for the business and risks of a particular tax (financial) adviser.

Some tax (financial) advisers might find it helpful to engage external consultants, actuaries, brokers or advisers to undertake a risk assessment of their business and provide advice on the amount and terms of cover that they should obtain. The TPB encourages this, provided that the TPB’s minimum requirements are met.


Principle 3: Practical availability

One of the considerations relevant to the assessment of the adequacy of PI insurance cover is what is practically available at any given time.

The TPB is aware that the nature and extent of coverage of PI insurance may be limited from time to time by what the PI insurance market will provide in a fluctuating market and that there may be times where PI insurance is less freely available (for example, during a future ‘hard’ insurance market). This can have a material impact on the scope and effectiveness of PI insurance cover and therefore PI insurance cover that achieves the policy objective may sometimes be more difficult to achieve.

The TPB has considered these factors in the formulation of its PI insurance requirements and in the setting of the minimum requirements set out in Table 5 of this exposure draft. The TPB believes that its minimum requirements are reasonable and should generally be able to be achieved by tax (financial) advisers. The TPB will continue to monitor and consider what is practically available in the insurance market and how that will affect the TPB’s PI insurance requirements. 

 

Adequate PI insurance cover

What is ‘adequate’

Tax (financial) advisers must at all times maintain adequate PI insurance cover which complies with the TPB’s requirements. Adequate cover is cover that will:

  • Adequately indemnify a tax (financial) adviser against any civil liability that may arise in the tax (financial) adviser’s provision of tax (financial) advice services; and
  • which meets the policy objective of reducing the risk that client losses are not compensated by the tax (financial) adviser due to the tax (financial) adviser having inadequate financial resources or for any other reason.

 

The TPB requires that tax (financial) advisers hold PI insurance that is ‘adequate’, having regard to the nature of the tax (financial) adviser’s business, including:

  • the volume of business in terms of turnover (see the Key terms section of this exposure draft)

  • the number and kind of clients

  • the kind or types of tax advice provided

  • the number of representatives

  • the degree of risk.

This is not an exhaustive list of the factors that tax (financial) advisers need to take into account in assessing what PI insurance cover is adequate in their circumstances.


Amount of cover

To be adequate overall, a PI insurance policy must have a sufficient amount of cover that at least meets the TPB’s minimum requirements and covers a reasonable estimate of clients’ potential losses (see step 2 in Table 4 and amount of cover in Table 5 below).

Further, the TPB requires that tax (financial) advisers obtain PI insurance cover that provides legal and defence ‘costs exclusive’ or ‘costs in addition’ amount of cover.


Scope of cover

The TPB’s PI insurance requirements require that the insurance must cover civil liability arising from any act, error or omission in the provision of tax (financial) advice services.


Terms and exclusions

If exclusions in a PI insurance policy undermine the policy objective, the cover may not be adequate. This applies especially to exclusions that directly affect the minimum requirements set out in Table 5 below. If an exclusion removes a minimum requirement, the cover will not be adequate.


Deductibles, excesses and the tax (financial) adviser’s financial resources

Consideration of the financial resources of the tax (financial) adviser seen through the size of the business of the tax (financial) adviser is a necessary element in assessment of the adequacy of PI insurance cover.

The TPB is aware that there is generally an excess on insurance policies. All tax (financial) advisers who are insured need to consider how they will cover the excess.

To meet the TPB’s minimum requirements, tax (financial) advisers must ensure that any excess under the PI insurance policy is at a level that the business can confidently sustain as an uninsured loss taking into account the tax (financial) adviser’s financial resources.

Tax (financial) advisers should retain records of this assessment of their excess level. These records should indicate how the financial resources were calculated using capital, cash flow, overdraft or support from a parent company.

 

Assessing adequacy

Whether a particular PI insurance policy or cover is adequate for a particular tax (financial) adviser depends on all the facts and circumstances, including the nature, scale and complexity of the tax (financial) adviser’s business, and their other financial resources. Therefore, it is the responsibility of each tax (financial) adviser to determine what is adequate PI insurance cover for them and to obtain the required PI insurance cover, ensuring that it at least meets the TPB’s minimum requirements.

Table 4 gives guidance on the processes the TPB recognises that tax (financial) advisers should go through to determine what is adequate PI insurance cover for them. However, the TPB will not generally ‘approve’ a tax (financial) adviser’s PI insurance arrangements on a case by case basis unless, in the TPB’s discretion, there is reason to do so.


Initial assessment

The TPB suggests that tax (financial) advisers use the assessment process in Table 4 to determine what will be adequate PI insurance cover.


Table 4: Initial assessment process

Step 1: Assess the business

Review the business, taking into account any proposed changes to the business. Review the claims history (if any) and risk management procedures.

Note: the tax (financial) adviser should have regard to the factors listed under the 'What is adequate' section of this document, to assess the nature of the tax (financial) adviser's business.

Step 2: Assess potential liability

Determine ‘the maximum liability that has, realistically, some liability potential to arise’. The TPB suggests a tax (financial) adviser does this by making a reasonable estimate of the following factors:

  • the maximum exposure to any single client (‘worst case scenario’ per client)
  • the number of claims that could arise from a single event (potential for multiple claims)
  • the number of claims that might be expected during the policy period.

 

Step 3: Approach insurers/brokers

Ask insurers or insurance brokers for a list of key policy features, insurers/brokers exclusions and available extensions (based on full disclosure of your assessment in steps 1 and 2).

Step 4: Assess amount of cover

Consider whether the amount of cover is adequate. It should at least meet the TPB’s minimum requirements set out in Table 5 below.

Step 5: Assess scope of cover

Consider whether the scope of cover is adequate. It must at least meet the TPB’s minimum requirements.

Step 6: Review policy terms and exclusions

Review the policy features having regard to the TPB's minimum requirements set out in Table 5. Identify any exclusions and gaps in cover.

Step 7: Consider financial resources

Check that you have the financial resources to pay the excess, the estimated number of claims, and cover any gaps and legal costs.

Consider how these claims will be covered and retain records of the assessment, for example, through capital, cash flow, overdraft, support.



Ongoing assessment

The TPB requires tax (financial) advisers to review their PI insurance cover at least annually to ensure it continues to be adequate, for example, when their existing policy is due for renewal.

Tax (financial) advisers should also review the adequacy of their PI insurance coverage in light of any major changes in their business, for example, if they start providing new services or engage more representatives.

Once obtained, tax (financial) advisers must maintain PI insurance cover for as long as they are registered with the TPB, although this need not be done through the same insurer or insurers.

 

Compliance systems

The TPB holds tax (financial) advisers accountable for ensuring that their PI insurance policies are renewed when required, that premiums are paid on time and that their policies or other compensation arrangements continue to be adequate.

 

Authorised insurers

Generally, the cover needs to be from an insurer regulated by the Australian Prudential Regulation Authority (APRA), or operating under an exemption within the Insurance Act 1973 or the Insurance Regulations 2002. The TPB will advise tax (financial) advisers on a case by case basis if it determines some alternative source of cover is acceptable.

 

What the policy should cover and include

Minimum requirements for adequate PI insurance cover

Table 5 sets out the TPB’s view on the features a PI insurance policy should have in order for it to be ‘adequate’. The table includes what is considered to be the minimum requirements for these features. Additional factors tax (financial) advisers should consider when determining what is adequate, depending on their business and individual circumstances, are also suggested in the notes set out in the table.


Table 5: Features of adequate PI insurance cover and minimum requirements

Policy feature

Minimum requirements and factors to consider

Amount of cover

The TPB requires that tax (financial) advisers have a minimum amount of cover of $2 million for any one claim and in the aggregate for tax (financial) advisers with total revenue of $2 million or less. For tax (financial) advisers with total revenue greater than $2 million, the TPB requires cover to be approximately equal to actual or expected revenue (up to a maximum limit of $20 million).

Further, a tax (financial) adviser must assess their own PI insurance requirements by considering their own business and risk circumstances and obtain PI insurance that is appropriate for them, factoring in legal or defence costs. If the results of the assessment are that less cover may be required, a tax (financial) adviser must nevertheless have cover to at least the minimum amount of cover.
The TPB encourages tax (financial) advisers to discuss their particular business circumstances with an insurance provider to assist in determining what is adequate PI insurance cover for a tax (financial) adviser.

Please note that what is an appropriate amount of cover for a tax (financial) adviser may in fact be more than what is set as the minimum requirement.

Scope of cover

The policy must include civil liability arising from any act, error or omission in the provision of tax (financial) advice services as defined in the TASA.

Persons covered

The policy must cover:

  • the tax (financial) adviser, directors, principals, partners, representatives and employees who provide tax (financial) advice services on behalf of the tax (financial) adviser

  • contractors who provide tax (financial) advice services on behalf of the tax (financial) adviser (refer to Note 2 below)

  • any other individuals or entities that provide tax (financial) advice services on behalf of the tax (financial) adviser.

Note 1: Tax (financial) advisers need to take into account all of their employees and representatives who are occupied in the provision of tax advice when considering the type and extent of cover that will be adequate. A client will generally have the same remedies against the tax (financial) adviser as it has against its employees and representatives of the tax (financial) adviser.

Note 2: The tax (financial) adviser’s policy does not need to indemnify the tax (financial) adviser for acts of its contractors and or representatives if such acts are adequately covered by the contractors’ or representatives’ own PI insurance cover.

Factors to consider

Are there many employees or representatives geographically dispersed? If so, the limit of indemnity might need to be higher to manage this risk.

Note: Experience suggests that the greater the number of employees or representatives that are working for a tax (financial) adviser and the more geographically dispersed they are, the greater may be the potential for client losses to occur. The number and distribution of employees and representatives might affect the tax (financial) adviser’s ability to adequately supervise its employees and representatives, and a tax (financial) adviser with a greater number of employees and representatives is likely to provide services to a greater number of clients.

Exclusions

The policy must not have the effect of excluding cover for the work of contractors if the result is that there is no cover for the tax (financial) advice services that are provided to the client.

Note: A policy may include a term prohibiting the tax (financial) adviser from admitting liability for any claim, loss or demand.

Excess/deductibles

Tax (financial) advisers must ensure that any excess under the PI insurance policy is at a level that the business can confidently sustain as an uninsured loss taking into account the tax (financial) adviser’s financial resources.

Note 1: A business with a lower cash flow available to meet claims might require a larger amount of cover or cover with a lower excess or both. If there is a limited asset base available to meet claims, a policy with a lower excess might be preferable. The TPB is aware that available PI insurance policies generally have an excess. Therefore, the TPB considers that whether a tax (financial) adviser has sufficient cash flow to meet the excess for a reasonable estimate of claims is a relevant consideration in determining whether a PI insurance policy is adequate for that tax (financial) adviser.

Note 2: If the excess is significant relevant to the limit of indemnity, tax (financial) advisers should seek approval from the TPB as an alternative arrangement as we consider this kind of arrangement to be effectively self-insurance rather than PI insurance.

Insurance provider

The TPB requires that the PI insurance cover must be provided by:

  • an APRA approved insurer

  • an insurer who is not APRA approved but otherwise permitted to provide insurance in Australia under the Insurance Act 1973

  • an unauthorised foreign insurer if they are providing insurance in accordance with Part 2 of the Insurance Regulations 2002, or

  • other insurance providers as approved by the TPB.

Legal/defence costs

Defence costs must be ‘in addition’ to the minimum limit or the level of cover must be sufficiently increased to take into account these costs.

Retroactive cover

If the tax (financial) adviser had an immediately previous PI insurance policy, the policy must provide retroactive cover to the earlier of:

  • the retroactive date specified in the most recent PI insurance policy; or

  • the commencement date of the first PI insurance policy in the series of continuous policies.



TPB recommendation on additional features of PI insurance cover and extensions

There are some features of the PI insurance cover and extensions to PI insurance cover which the TPB recommends tax (financial) advisers obtain. These are set out in Table 6 below.


Table 6: TPB recommendations on additional PI insurance features and extensions

Policy feature

TPB recommendation

Fraud/dishonesty/fidelity

The TPB recommends that tax (financial) advisers have:

  • innocent party fidelity cover in respect of the actions of employees or partners/directors (except sole practitioner tax (financial) advisers), and
  • innocent party fraud/dishonesty cover in respect of the actions of employees or partners/directors (except sole practitioner tax (financial) advisers).

 

Note: A policy may include a term prohibiting the tax (financial) adviser from admitting liability for any claim, loss or demand.

Run-off cover

The TPB recommends that a tax (financial) adviser obtain run-off cover if the tax (financial) adviser proposes to cease providing tax (financial) advice services.

Applications for alternative arrangements to be considered as meeting the TPB’s PI insurance requirements

The TPB will generally consider that applications for alternative arrangements meet the TPB’s PI insurance requirements for operations where it can be demonstrated that there are satisfactory arrangements for compensation of clients of tax (financial) advisers, having regard to the policy objective and the requirements set out in this document.

Further, the TPB considers that self-insurance arrangements are alternative arrangements which require TPB approval in order to be considered as  meeting the TPB’s PI insurance requirements.


How to make an application for alternative arrangements

Tax (financial) advisers who wish to apply to have alternative arrangements considered as meeting the TPB’s PI insurance requirements will need to lodge an application.

An application to the TPB for alternative arrangements, to be considered as meeting the TPB’s PI insurance requirements, should address the following issues:

  1. Which tax (financial) advisers and representatives will be covered by the alternative arrangements, for example, will the alternative arrangements cover a group of related tax (financial) advisers or an industry sector?

  2. How the compensation arrangements that the applicant has in place do and do not meet the criteria for assessing adequate PI insurance in accordance with the TPB’s PI insurance requirements (see the Adequate PI insurance cover section of this TPB (EP)).

  3. Any benefits, risks, or costs to clients arising from the tax (financial) adviser using alternative arrangements as opposed to the TPB’s general PI insurance requirements.

  4. Any circumstances particular to the tax (financial) adviser or the industry sector which make these arrangements more appropriate than the TPB’s general PI insurance requirements.

  5. Confirm that the tax (financial) adviser will advise the TPB if the alternative arrangements are cancelled, varied or become unavailable for any reason.

  6. Whether the compensation arrangements have been approved by ASIC in accordance with RG 126, under paragraph 912B(2)(b) of the Corporations Act 2001.

The TPB will generally ask for an expert’s report, for example an actuarial report, to be submitted with the application to assess whether the alternative arrangements provide a satisfactory level of compensation to the clients of the tax (financial) adviser, having regard to the policy objective and the requirements set out in this document.

Tax (financial) advisers who wish to maintain arrangements that were already in place before 1 July 2014 must address the same criteria as for new applications for alternative arrangements.

Applications must be made in writing and sent to the Secretary of the TPB, either by email to enquirymanagement@tpb.gov.au, or by post to:

Tax Practitioners Board
GPO Box 1620
SYDNEY NSW 2001


How the TPB will assess applications for alternative arrangements

The TPB will assess each application on its merits. The TPB may, if appropriate, give priority to group applications, for example, for an industry sector or sub-sector.

The TPB will only approve an application for alternative arrangements to be considered as meeting the TPB’s PI insurance requirements where it can be demonstrated that there are satisfactory arrangements for compensation of clients of tax (financial) advisers, having regard to the policy objective and the requirements set out in this document. The TPB recognises that some alternative arrangements may in fact provide a higher level of cover.

In considering applications, the TPB will take into account the factors used to assess adequacy of PI insurance in accordance with the TPB’s PI insurance requirements. This means that any alternative arrangements must also be adequate having regard to:

  • the volume of business in terms of turnover

  • the number and kind of clients

  • the kind or kinds of business

  • the number of employees and representatives, and

  • the degree of risk.

These factors together with any additional factors considered to be relevant should be addressed in the application made to the TPB.

An important feature of PI insurance is that it is provided by a third party, which offers some security that the arrangements will be enforceable in the event of fraud by tax (financial) advisers or their officers. Therefore, one factor that the TPB will consider in assessing alternative arrangements is the degree to which the arrangements are provided on arm’s length terms.


Example: Self-insurance

Approval of self-insurance will depend on the amount of compensation that would be available for clients and having regard to the size and risk of the tax (financial) adviser’s business.  When considering an application for self-insurance to be approved by the TPB as meeting its PI insurance requirements, the TPB will also take into account whether ASIC has approved the arrangement.


Compensation arrangements during the assessment process

The process for consideration of an application for alternative arrangements to be considered to meet the TPB’s PI insurance requirements may be time consuming to assess. Until notified of the decision, tax (financial) advisers applying for approval of an application should continue to hold any PI insurance cover they have previously obtained or keep in place any other compensation arrangements they have previously implemented.

 

Key terms

The following is a list of key terms and their meaning in this document.

Alternative arrangement

An alternative arrangement is an arrangement that is not a contract of PI insurance, but which the TPB may approve as adequate to satisfy the TPB’s PI insurance requirements.

Amount of cover

The amount of cover is the maximum amount of money the insurer has agreed to provide for payment of claims made against a tax (financial) adviser.

APRA

The Australian Prudential Regulation Authority.

ASIC

The Australian Securities and Investments Commission.

Civil liability

Civil liability is liability of one party to another arising out of civil law, as opposed to criminal law. There are generally four branches of civil law:

  1. tort law (such as the common law torts of negligence, nuisance, and defamation)
  2. contract law (breach of contract)
  3. statutory law (for example, the Competition and Consumer Act 2010)
  4. equity (a system of law based on the principle of ‘fairness’ designed to furnish remedies for wrongs which were not legally recognised or for which no adequate remedy was provided by the common law).

A civil liability wording ordinarily covers all four branches of civil law. However, the policy only responds to civil liability for claims arising from the conduct by the insured of the nominated professional services stated in the policy schedule.

Code of Professional Conduct (Code)

The Code is contained in section 30-10 of the Tax Agent Services Act 2009 (TASA). It sets out standards of professional and ethical conduct with which tax (financial) advisers must comply.

Costs exclusive (or costs in addition)

Legal/defence costs cover does not form part of the amount of cover that is used to pay a claim as opposed to costs inclusive where the legal/defence costs cover forms part of the same amount of cover that is used to pay a claim.

Cover/coverage

Tax (financial) advisers are only required to have PI insurance cover to meet the TPB’s requirements. This may mean that they do not actually hold their own PI insurance policy, but rather are covered by the PI insurance policy of someone else. For example, an individual tax (financial) adviser who is an employee of a registered company tax (financial) adviser would likely be covered by the PI insurance policy held by the employer registered company tax (financial) adviser, therefore the individual would not have to have their own PI insurance policy in order to meet the TPB’s PI insurance requirements.

Excess (also known as deductible)

The first part of a loss, which is borne by the insured. The insured is responsible for the loss up to the deductible/excess amount and the insurer pays the remainder of the loss up to the policy limit. The excess can be inclusive or exclusive of costs and expenses.

Exclusion

A provision of an insurance policy that precludes coverage in particular circumstances.

Fraud/dishonesty cover

Covering claims made against an innocent insured for compensation resulting from fraudulent, dishonest or criminal acts. Cover will not extend to the perpetrator of such fraudulent, dishonest or criminal act.

Innocent party

Some cover, such as fidelity and fraud/dishonesty cover, will only extend to the insured tax (financial) adviser if they were an innocent party, that is, they were not responsible and had had no prior knowledge of the conduct that led to the claim.

Insured

Any person who is covered by the PI insurance policy.

Insurer

The entity providing the PI insurance policy.

Legal/defence costs

The costs associated with defending a claim for civil liability.

Minimum requirements

Minimum requirements means the amount and terms of cover that the TPB requires to be included in the insurance coverage of a registered tax (financial) adviser, as specified by the TPB from time to time.

PI insurance

Professional indemnity insurance.

PI insurance requirements

The overall description of the TPB’s PI insurance requirements that are set out in this document.

Run-off cover

Professional indemnity policies are usually on a claims made and notified policy basis. This means that in order to trigger the policy the claim must be made against the insured and reported to the insurer during the policy period. Tax (financial) advisers, companies or individuals ceasing business still have exposure to claims being made after their business ceases arising from their previous business activities.

Run off cover provides cover for unknown claims made and reported following expiration of the PI insurance policy arising out of acts, errors or omissions occurring during the period of run-off insurance cover.

Some PI insurance policies will provide automatic run-off cover up until the end of the policy period of insurance should the policy be cancelled during the policy period.

Self-insurance

Setting aside a calculated amount of money to form a source of compensation for potential claims (this could include large institutional entities).

Scope of cover

The scope of cover defines the terms and conditions under which indemnity is provided or excluded under the insurance policy.

Sole practitioner tax (financial) advisers

A sole practitioner tax (financial) adviser is a tax (financial) adviser who operates on their own with no partners, employees, representatives or contract staff. Certain areas of cover, such as fidelity and fraud/dishonesty cover, are not required of sole practitioner tax (financial) advisers, nor would it be available as the insured tax (financial) adviser could not be an innocent party if they operate their business on their own.

Turnover

The total amount of business revenue received by the tax (financial) adviser excluding GST.

 



[1] ASIC’s Regulatory Guide 126: Compensation and insurance arrangements for AFS licensees provides that ‘self-insurance’ relates to setting aside a calculated amount of money to form a source of compensation for potential claims.

[2] Lengyel and Tax Practitioners Board [2012] AATA 134.

[3] An honorarium includes an honorary reward for voluntary services or a fee for professional services voluntarily rendered. For example, the voluntary provision of tax (financial) advice services for a not-for-profit entity.

[4] See example 3.16 in the Explanatory Memorandum to the Tax Laws Amendment (2013 Measures No. 2) Bill 2013, which amended the PI insurance requirements in the TASA from 30 June 2013.

[5] Tax Agent Services Act 2009 (TASA), section 2-5 
[6] Section 910A of the Corporations Act 2001 defines representatives of an AFS licensee as an authorised representative of an AFS licensee, an employee or director of an AFS licensee, an employee or director of a related body corporate of an AFS licensee or any person acting on behalf of the AFS licensee.
[7] See Part 4 of the TASA.