Advice Risk Management – Joining The Dots Between Professional Indemnity Insurance And Risk

Continuing with our PI insurance and risk theme, this article will join the dots between advice risk management and PI. Outlining the relationship between advice complaints and PI claims enables you to single out the risks that must be mitigated if you are to have any chance of reducing your PI premiums.

Navigating risks can seem like a puzzle. Too often we see groups jumping to a solution reactively, without first working through what is needed to address their risks. This is not serving their aim to reduce PI insurance premiums.

We know from experience that when you reduce the risk of complaints, this can reduce the risk of PI claims, which can potentially lower the PI insurance premiums you pay.

It follows then, to reduce your risk, you must start by focusing on the common causes of claims to examine where the risks are occurring. This will provide you the basis upon where you must improve your risk mitigation strategies, to bridge the gaps and prevent breakdowns that commonly lead to complaints and PI claims.

PI Insurance Risk Assessment Is Multifaceted

In this PI and risk series, we will categorise operational breakdowns leading to common complaints and PI claims into two main tiers:

• Tier 1: Coalface – Advice And Service Given By Authorised Representatives (ARs)
• Tier 2: Oversight Failure And Operational Shortcomings – Australian Financial Services Licensee (AFSL)

Tier 1: Coalface Advice -Top Five Complaints

1. Misinterpretation of product terms and conditions
2. Poor or inadequate service delivery falling short on promises given or quality
3. Failure to follow instructions of their client agreements
4. Inability to demonstrate the AR acted in the client’s best interest
5. Inappropriate, misguided advice

Tier 2: AFSL Oversight Failure And Operational Shortcomings

Tier 2 top five operational and oversight breakdowns reported by PI insurers for AFSLs are:

1. Nil or poor Board oversight leading to lack of focus and accountability
2. Insufficient complaints handling demonstrated, without up-to-date register detailing treatment, management oversight, remedies or outcomes
3. Poor documentation of Investment Committee decisions
4. Unmanageable rapid growth
5. Failure to implement adequate Group Cyber Security measures

There Are No Limits To The Risks Faced

Identifying the top five issues at each tier provides the basis to commence formulating key mitigation strategies for your practice and group. It is not intended to limit the list of items that could or do occur, resulting in complaints and PI claims. You may have experienced other issues aside from these. If you have, you’ll need to factor these in when strategising to mitigate in future. Then you must demonstrate how you intend to manage the risks you face, with action.

The Domino Effect: All Things Affect Others

Don’t make the mistake of believing the identified risks won’t impact the PI premiums you’ll pay, just because you have never had a claim in the areas outlined. Issues faced by your peers will also impact your premiums. This is why it is important to have as many advice groups actively mitigating the range of risks appearing. As all things affect others, the whole industry has to address these risks to help bring down the overall market-place risk ratings.

Demonstrate You Are Actively Reducing Risk

To demonstrate you are reducing your risk in a manner that can potentially reduce your PI insurance premiums, you must illustrate you know the underlying causes and show how you are able to bridge the gaps to achieve effective risk management.

In this article, we will dive deeper into the mitigation strategies for the top five Tier 1 advice breakdowns. The Tier 2 risk mitigation discussion will be examined more thoroughly in the next article of this PI risk series (stay tuned for that).

How To Mitigate Tier 1 Top Five Risks

1. Misinterpretation of product terms and conditions

With the rate of change and product range available, it isn’t any surprise that you can misconstrue these from time to time. Often the products have such complex and varied features, terms and conditions, that can frequently change without warning. 

Limit the product range available on the Approved Product List (APL) may be one way to mitigate this risk. Alternatively, at least limit the products you advise on until you have a thorough and deep knowledge of the products you recommend. You will also need to demonstrate you understand the appropriate application and use for the products you advise on. 

Ongoing Training about the products within the APL range is the key to mitigating potential misinterpretation of product terms and conditions.  Demonstrated assessment of how these can be appropriately applied for your clients, with test cases to refer to can also be helpful.  Reviewing your knowledge and capability ongoing is essential especially as product and market variables change all the time.  This may seem too obvious, but it is common to assume ARs are knowledgeable across all the products on the APL due to their qualifications, experience or time in the industry.  However, it is nearly impossible to stay on top of all the products and changes as they occur all the time. It’s too easy to get it wrong. The only way you’re going to come close to mitigating this risk is to ensure you and your people are properly trained, ongoing.

Tricks & Traps – Don’t make the mistake of believing your Continuing Professional Development (CPD) is simple points gathering exercise. 

Your ongoing CPD achievements must relate to the type of advice you provide.  Keeping records that reflect how you bridge your knowledge gaps is your way to demonstrate you are mitigating the risk of misinterpreting products you recommend.

2. Poor or inadequate service delivery falling short on quality or promises given

Promised services may be given with good intentions, however when the ‘busyness’ of running your practice is upon you, it doesn’t take much to overlook something important. That could adversely impact a client, or disappoint them in a manner that causes a complaint. 

Mitigating this risk can be demonstrated by being very organised, with systems that remind you and responsible people in your team, of what is due and when. Take this further to implement systems that enable you to action the deliverable promptly, with records of the actions taken as you go. 

Tricks & Traps –  Don’t make the mistake of believing you can always remember all that you must do or have done.  When you can clearly demonstrate the actions you’ve taken and can easily report on it as evidence of your process, then you’re taking the right steps to mitigate the risk of delivering poor or inadequate service.

3. Failure to follow instructions of advice client agreements

Listening is a highly undervalued attribute when giving advice.  Being busy can cause you to pigeon-hole clients’ needs and instructions, but this can get you into a lot of trouble.  Disciplining yourself with consistent quality notes of discussions can be an excellent way to demonstrate your understanding of your client’s instructions.  These can be your saving grace if ever a dispute arises. Some ARs are recording their client conversations and meetings, then transcribing these into written notes for file by using systems like Otter.ai. 

Tricks & Traps – Don’t fall into the trap of believing you’ve got it covered just because you’ve recorded the conversation alone.  You still must listen, acknowledge and action the stated aims and instructions of your clients. Failing to listen and action will get you into hot water.  Failing to gain formal acknowledgement of your interpretation of the instructions from your client could be your downfall.

You must keep thorough records of your understanding of each clients needs and instructions if you are going to mitigate this common breakdown.

4. Inability to demonstrate the AR acted in the client’s best interest

This can be subjective and difficult to demonstrate without adequate records of the basis upon which your advice was formulated and given.  Maintaining documentary evidence of client facts and anything researched on their behalf will form a strong foundation.  Demonstrating strategic modelling and calculations have been carried out will reinforce the effort you’ve made when providing advice that is in your client’s best interests.  Your background workings do not necessarily have to be supplied to each client, however, ensure you have these on file for situations where the advice you gave is called into question.  Back yourself up. Thorough and methodical process will serve you well in demonstrating your efforts when advising your clients. 

Tricks & Traps – Remember when issues flare up, it’s not usually days or weeks after the advice was given.  Typically, complaints will show up years after advice was given.  This can make it difficult to recall all the finer points covered after the passage of time has passed.  Demonstrate your professionalism in action with thorough records that you can easily recall if ever it becomes necessary.  When you can show your process was thorough and well considered, and in line with client’s stated needs and instructions, then you will be doing all in your power to mitigate risk of being accused of advice not in the best interests of your client.  

5. Inappropriate, misguided advice

Inappropriate advice can occur when advice is deliberately given in a manner that suits the AR (for his or her own reasons or benefits) rather than what suits the client.  An example could be advice that is cookie-cutter style (where everyone gets the same advice regardless of the client’s needs, because it’s easier for the AR). 

Sometimes inappropriate advice can occur when you give advice outside of your usual scope, range or competence.  For example, a degree qualified AR with 10 years experience, that mainly gives client advice is in the realm of superannuation and insurance.  His/her competence is high within this scope.  However, when a referral is received to advise a client on Aged Care, the AR seizes the new client opportunity and gives advice not quite within their usual expertise.  This represents a risk to the client and the practice.  To provide appropriate advice within this highly specialised and complex area, it requires experience and detailed expertise that the AR maybe unaware of, causing inappropriate advice that results in a set-back for the client, leading to a complaint and a successful PI claim.

Tricks & Traps –  Don’t fall into the trap of believing you can work it out and learn as you go, or that you can squeeze every client into the same strategy. Being too relaxed or overconfident with your strategies could be your downfall.

Summary Overview of Tier 1 Risk Mitigation

• Mitigating these risks requires truthful self-awareness, honesty and integrity;  
• Your Ongoing training should relate to the areas of advice you frequently give, constantly keeping technical strategies and product terms and conditions updated and fresh in your mind;
• You must be prepared to proactively take supervision from someone more competent and experienced than you are, when the advice you need to give is outside of your normal realm or scope.  This the only way you can avoid giving misguided inappropriate advice. 
• Listen carefully to your clients and keep methodical thorough records of your interactions and workings when formulating the advice you give.  This is the only way you can justify your advice was appropriate and in the client’s best interests after the passage of time, to protect your professional reputation;
• Make these suggestions internal policy that you enforce.  Implement systems that efficiently support your operation, with ease of recall and reporting. This is the only way to optimise the chance of the advice you give being deemed appropriate and risk averse in a way for your clients, that may also save you from time drain, reputational damage and potentially a lot of money on PI premiums. 

We want to hear from AFSL groups and ARs serious about mitigating advice risk and who are willing to participate in a trial that will be observed by Lloyd’s of London for the purpose of potentially reducing their PI premiums. To participate: Contact Us

This program will suit participants actively pursuing an approach that could indelibly brand them with the much sought after respect, trust and professionalism aimed for.

Our purpose is to achieve outstanding operational standards for AFSLs and AR’s, to gain the highest level of esteem from the consumers they serve; whilst ultimately reducing risk, PI premiums and other operational costs for greater profitability.

Leigh Anoos is the Managing Director of Easy Monitor Https://easymonitor.com.au

Need to know more? Download your free copy of the AFSL Guide to Professional Indemnity Cover

Stay tuned for the next part in this series, that focuses on Tier 2 Risk Mitigation for AFSLs