Australian Financial Review Article October 19th 2020
'Financial heroin hits' : Three CFD firms fined total of $75m.
“A trio of derivatives trading firms that targeted retail investors with high-risk products was hit with a $75 million penalty by the Federal Court in a case brought by the corporate regulator.”
The recent landmark fines imposed against three CFD providers, totalling $75 million, is a timely reminder to ensure that your firm has an adequately structured insurance and risk management program, that may respond to these types of losses.
Professional Indemnity insurance is mandated by ASIC where an AFSL holder provides products or services to retail clients. Many smaller firms often overlook other valuable insurance covers, particularly given the escalating cost of Professional Indemnity insurance.
To make it simple, with regard specifically to Fines and Penalties, we'll look at what is covered by the following classes of insurance :
Directors and Officers Liability
Whilst Directors and Officers (D&O) Liability insurance affords some protection for fines and penalties, broadly speaking this cover extends only to fines imposed against the individual Director’s (and others as defined in the policy Terms and Conditions). D&O policies broadly will not extend to fines levelled against the entity as this is largely an impasse to the Director specific intent of the cover. In the aforementioned scenario ASIC imposed the significant penalties directly against the respective entities.
Professional Indemnity
If D&O doesn't provide cover for Fines and Penalties imposed against an entity, then surely professional indemnity does ?
Pre Hayne Royal Commission a number of Professional Indemnity policies included, generally on a sub-limited basis, extensions for fines and penalties against the Named Insured (often being the entity/AFSL Holder), however post Hayne we have largely seen these coverage extensions removed.
Whilst the fines imposed against the aforementioned CFD providers doesn't reflect the average risk for many firms, it is vitally important for AFSL holders to manage their exposure to Regulatory risk–A prudent way to do this would be to consider a stand-alone Statutory Liability policy.
Statutory Liability
A Statutory Liability policy can provide cover for the company, senior management and employees for allegations of wrongful breaches of key legislation in the course of providing the professional services and may extend to supplementary legal expenses also.
We encourage you to review your current insurance program, to ensure that you are both comfortable and familiar the breadth and intent of cover provided.
Written by Ben Glover 04/12/2020
Copyright © 2020 Insight Risk Advisers Pty Ltd- All Rights Reserved.
By virtue of the business dynamic, Financial Services firms are considered a "soft target" by Cyber Criminals. Cyber thieves are immediately drawn to the transactional aspect of Financial Services Firms as recently witnessed by the significant Social Engineering loss sustained by Levitas Capital. Additionally, due to AML/CTF identification requirements firms are exposed to potential ransomware attacks.
Whilst calculated attacks against Financial Services firms is nothing new, there is an additional layer of potential complexity that exists for Listed Entities (and private companies to a slightly lesser extent) who do not possess adequate Cyber loss mitigation strategies (including but not limited to insurance).
Whilst we are yet to see any significant litigation, it stands to reason that a large scale loss emanating from a Cyber Event, that in-turn has a meaningful impact on share or unit price, be that directly or via downturn in market sentiment more broadly, resulting in a significant sell off, has the potential to lead to allegations of a Wrongful Act (mismanagement) under a D&O policy.
Allegations are likely to include - negligence/wrongful act in not adequately assessing, considering or transferring where possible the entities exposure to a cyber event/loss.
Whilst the mechanism of loss as suffered by Levitas Capital is not necessarily specific to all businesses, it is prudent to raise from a broader perspective the intrinsic tie-in between a significant Cyber Event and the Boards ongoing obligations.
Written by Ben Glover 04/12/2020
Copyright © 2020 Insight Risk Advisers Pty Ltd- All Rights Reserved.
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