Beware ‘phoenix’ IFAs in Australia, say PI insurance experts

Professional indemnity insurance experts recently cautioned those doing business in Australia as reports emerge that improper financial regulation is is permitting insolvent and failed IFAs to simply reopen their businesses under a new name.

Highly reminiscent of the infamous building industry practice referred to as ‘phoenix’ companies, dishonest IFAs have been ducking out of their professional liability insurance responsibilities by shutting down their initial business and then opening up a new one.  This allows these companies to avoid having to pay out on business liability insurance claims.

One national legal firm spokesperson remarked that rogue financial advisers that negligently give advice to their clients need only re-establish their businesses and continue to provide poor advice as a result of the legal loophole.  The spokesperson revealed a case wherein several clients were looking to be awarded for damage for example, but the offending firm first claimed insolvency before re-opening under a different name as one prime example of the behaviour.

A large percentage of financial advisers in Australia lack adequate levels of insurance cover to deal with such a claim, which adds to the problem and encourages the practice.  One firm was found to have taken out 2 million AUD in cover, only to find its cover nearly depleted and in danger of running out.

Even if such a financial adviser firm has adequate cover, many of their policies will not cover any claims that involve insolvency, material non-disclosure, or fraud, industry experts say.  The unfortunate result is that consumers are left high and dry, said Carolyn Bond, chief executive of Australia’s Consumer Action Law Centre.

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