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<br><P><A name=a10To></P>
<P>Ms Jennifer Marshall</A></P>
<P><A name=a29Address>Attorney General's Department</P>
<P>Goodsell Building</P>
<P>8-12 Chifley Square</P>
<P>SYDNEY NSW 2000</A></P>
<P> </P>
<P> </P>
<P>Dear Ms Marshall</P>
<P>This submission is made to you in connection with the report you are preparing for SCAG and MINCO on Professional Standards Legislation (PSL). I ask that you consider this submission in making your recommendations. </P>
<P>This submission is made by Professions Australia, a national organisation of professional associations, representing some 200 000 professionals throughout Australia. These professionals are accountants, architects, audiologists, computer professionals, dentists, engineers, mining engineers and metallurgists, pharmacists, physiotherapists, quantity surveyors, and surveyors. The NSW Council of Professions is also affiliated and it represents doctors, lawyers and veterinarians as well as the above professions.</P><B>
<P>Introduction</P></B>
<P>Most professions are experiencing a crisis of availability and affordability of professional indemnity insurance, which will have severe implications for the public if not addressed quickly. The public would benefit from a solution which addresses both the immediate insurance issue and also the way in which professionals deliver services.</P>
<P>Two inter-connected measures for reform are proposed by the professions, which together provide this solution:</P>
<UL>
<UL>
<LI>to introduce Australia-wide comprehensive <B>risk management and accountability schemes</B> applying to professionals, along with a "<B>safety ceiling</B>" on the liability of professional service providers for damages (eg a ceiling limited to ten times the amount of the fee, up to a significant maximum amount). It is proposed that these reforms would be provided through schemes similar to those existing under the Professional Standards legislation in NSW and would include amendments to Federal legislation (eg Trade Practices Act) to ensure all jurisdictions and causes of action are covered. This concept is described as a "national PSL scheme" in this submission; and</LI></UL></UL>
<UL>
<UL>
<LI>that the present system of joint and several liability of defendants in actions for negligence causing financial damage or economic loss be replaced by <B>liability which is proportionate to each defendant’s degree of fault.</LI></UL></UL></B>
<P>This submission addresses the public benefits which would be created by these reforms, with particular reference to a national PSL scheme. </P>
<P>The primary benefits to the public from the introduction of these reforms, particularly a national PSL scheme, are:</P>
<OL>
<LI>Ensuring the public continues to benefit from the security of appropriately insured defendants.</LI>
<LI>Ensuring the public is protected by the high Professional Standards required under a national PSL scheme, including broad-based risk management strategies, and ensuring greater accountability of professionals to the communities they serve.</LI>
<LI>Reducing the frequency of complaints and resort to litigation. </LI>
<LI>Ensuring that professional services in areas deemed by insurers as "high risk", such as financial planning, audit and tax advice, continue to be available to the public and ensuring affordable professional services continue to be available to a wide range of community, sporting, charitable and not-for-profit organisations.</LI>
<LI>Creating an environment where professions are encouraged to go beyond the minimum and add significant additional value.</LI>
<LI>Encouraging professions to take on higher risk, small or start-up clients.</LI></OL>
<P>These benefits are detailed below.</P><B>
<P>Major Public Benefits from the Implementation of a National PSL Scheme</P></B><B><I>
<P>1. Ensuring the Public Continues to Benefit from the Security of Appropriately Insured Defendants</P></B></I>
<P>A fundamental public benefit resulting from these reforms is that, if a member of the public brings a claim against a professional services provider, insurance will exist to support the claim.</P><B><I>
<P> </P>
<P>Current Position</P></B></I>
<P>That a crisis exists in the professional indemnity insurance (PII) market for professional service providers is clear. Insurance premiums are spiralling, and cover is becoming difficult or impossible to obtain. A number of associations representing various professions have reported recent premium increases for their members of 100 per cent to over 1000 per cent. </P>
<P>In addition, there has been a vast reduction in the availability of cover. The number of active underwriters for accountants, for example, has recently declined from 37 to less than 5, cover in the local market is not available at all to the largest firms, and ICAA and CPA members, engineers, architects and other professions are experiencing an increasing range of activities being excluded from coverage by insurers, or the coverage has been greatly reduced by policy wording changes. </P>
<P>Underwriting capacity in the PI market is very fluid and can shift between markets quickly and easily. Insurers are demonstrating that they will not underwrite risks where there are no calculable limits.</P><B><I>
<P>Position after the Reforms are Implemented </P></B></I>
<P>The reforms proposed will ensure that the public will continue to benefit from the security of appropriately insured defendants, by ensuring that insurance is available and affordable. With a safety ceiling, insurers will know the upper amount for which claims can be made, which will allow them to cost their risk with certainty. This certainty is not available under the current liability regime. This certainty will encourage insurers back into the market, which will increase competition. Market forces will drive down premiums, making insurance affordable.</P>
<P>This result is supported by comments from the Insurance Council of Australia, quoted in a recent edition of the Australian Financial Review in the context of proposals for a national system that would put statutory limits on the potential liability of professionals:</P>
<P>"A spokesman for the Insurance Council of Australia said competition would ensure [premium] prices came down once the proposed reforms were in place. "Premiums reflect claims costs and risk" the spokesman said. "If the reforms being talked about return stability to the public liability market, then there will be an easing of pressure on premiums in a competitive environment." ("Senate Lashes Insurance Premiums" by Alessandra Fabro and Morgan Mellish, AFR, pages 1, 8). </P>
<P>It is also supported by evidence from participants in the NSW PSL Scheme. The Senate Economics Committee recorded in its recently released report that specialist engineers had reported reduced insurance premiums of 40 per cent and more following their participation in the Cover of Excellence scheme under the Professional Standards Act 1994 (NSW). </P>
<P> </P>
<P>Valuers had also seen insurance premiums drop from about 7 per cent to 3 per cent of gross fees since participating in the Cover of Excellence scheme (Senate Economics Committee Report "Inquiry into the Impact of Public Liability and Professional Indemnity Insurance Cost Insurances", paragraph 4.44, released on 22/10/02). One small firm of chartered accountants in NSW reported that their insurance costs were cut by 70 per cent under the PSL Scheme. </P>
<P>Recently Trowbridge Deloitte interviewed insurers and reinsurers about the likely effect on the availability and affordability of insurance from the introduction of proportionate liability and a national PSL scheme. Their report is annexed (Annexure A). Their conclusions are:</P>
<OL type=i>
<OL type=i>
<LI>the reforms would provide a significant improvement in the availability of PI cover for professional advisers;</LI>
<LI>in due course, premium savings of approximately 20 per cent for smaller firms might be expected, with greater premium savings possible for larger firms;</LI><B>
<LI>without such reforms, obtaining professional indemnity insurance will become increasingly difficult in future, with further steep increases in premiums and the strong possibility of cover being unavailable for some groups.</LI></OL></OL></B><B>
<P>"Full Compensation"/Insurance Requirements under PSL</P></B>
<P>Some commentators may criticise the concept of a safety ceiling by suggesting that it potentially interferes with a plaintiff’s access to so-called "full compensation". It is proposed that the safety ceiling would be set at a level that will permit the payment of all consumer claims and the vast majority (over 95 per cent) of claims by corporations. However, it is illusory to consider "full compensation" as the key issue, as a defendant’s ability to pay compensation is affected by its ability to obtain, and pay for, insurance. </P>
<P>These reforms seek to ensure that, in the medium term, premiums fall and insurance becomes more available, so professional service providers are actually able to pay compensation to the public when required. The safety ceiling will not prevent claims being brought or pursued, but will on the contrary ensure that funds are available to support judgements obtained by the public.</P>
<P>Without insurance, there is little prospect of consumers obtaining compensation at all.</P>
<P>The Professional Standards model requires professionals to have sufficient insurance to cover claims. Professional Standards legislation would require the uninsured to insure and the underinsured to properly insure. Some professionals in NSW had to obtain more insurance cover to meet the requirements of the Professional Standards legislation. For example, accountants lifted their minimum insurance cover from $250,000 to $500,000 and beyond, depending on the size of an engagement. The minimum insurance for solicitors increased from $1.5 million to higher amounts determined by the size of the firm. </P>
<P>The NSW legislation requires that liability limits must be determined having regard to the number and amount of claims and, importantly, the need to protect consumers. Claims information is obtained from the insurance industry and other sources, and is independently actuarially assessed. Different liability limits are set that are specific to the claims experience of the particular professions rather than a "one size fits all" approach.</P>
<P>Professional Standards legislation is specifically designed to improve the prospects of recovery for consumers, rather than diminish them. </P><I><B>
<P>2. Ensuring the public continues to be protected by the higher Professional Standards required under the proposed reforms, including broad based risk management strategies,</I> <I>and ensuring greater accountability of professionals to the communities they serve.</P></B>
<P><BR></I>Professional Standards legislation, developed and applied consistently across the nation, holds the promise of reinforcing appropriate professional behaviour and professionals’ accountability to the communities they serve, while reducing the costs of dealing with damages arising from professionals’ work. <B>This legislation is designed to treat the cause of the problem, not just the symptom.</B> It works on continuously improving standards so that risk is reduced, there is improved access to compensation, and insurance is more affordable.</P>
<P>The vast majority of professionals in Australia are highly committed, ethical and provide quality service. Consumers recognise this and afford professionals a high degree of respect. But professionals and the people they serve also know that more can be done to manage the risks attendant on professional service and to enhance the accountability of professionals to the community.</P>
<P>Under Professional Standards legislation, professionals commit to comprehensive risk management schemes which deliver benefits to consumers. These schemes would be implemented under legislation like that already applying in NSW under the <I>Professional Standards Act 1994</I>. (The NSW Act does not apply to damages arising from death or personal injury or fraud or dishonesty.) </P>
<P>According to the NSW Professional Standards Council: "Professional standards schemes are designed to help protect consumers. They are legally binding arrangements which aim to improve the standards of members of professional and other occupational groups."</P>
<P>Only those professionals who satisfy certain requirements qualify for a scheme. They need to pass their associations’ entry requirements, which include formal academic qualifications, industry experience and must be of good character. They need to satisfy various criteria to be in a scheme, including qualifying for and holding a practising certificate, professional indemnity insurance, risk management training and other continuing professional development requirements, and so on.</P>
<P> </P>
<P>Some community benefits of Professional Standards legislation are:</P>
<OL>
<OL>
<LI>Professional bodies are required to implement comprehensive programs of risk management, which help to prevent problems in the work of professionals.</LI>
<LI>Professional bodies are required to implement proper complaints and disciplinary procedures to deal with community concerns.</LI></OL></OL>
<OL start=3>
<OL>
<LI>As noted above, the liability limitation would be set at a figure which would completely cover claims from individual members of the community, and the vast majority of other claims and liability limitations would be linked to compulsory PI insurance, ensuring certainty of insurance cover to support claims brought by members of the community. </LI></OL></OL>
<P>Some requirements of the NSW Accountants’ Scheme, for example, are:</P>
<UL>
<UL>
<LI>minimum professional education qualifications;</LI>
<LI>compliance with quality control programs;</LI>
<LI>continuing learning/professional education;</LI>
<LI>complaints and disciplinary processes; and</LI>
<LI>codes of ethical conduct.</LI></UL></UL>
<P>Having effective complaints and discipline arrangements means that unethical practitioners can be weeded out following customer complaints, be expelled from their association, and become ineligible for limitations on liability. Complaints processes can be reinforced by quality assurance reviews which help identify below-par practitioners while preserving standards across the profession. The consumer is protected also by codes of ethics and requirements to keep skills updated through continuing education and professional development.</P><B>
<P>As well as risk management, there is accountability and disclosure.</B> In the NSW model, professional associations with a Professional Standards scheme are required to monitor how they are managing risk. Their risk management schemes are published on the website of the Professional Standards Council. Their performance is publicly reported through Parliament. </P>
<P>In NSW, it has been necessary for associations to modify their systems and establish new systems in order for their scheme to be approved. For example, some had to improve their complaints and discipline systems or create a new system, others added "risk management" training to their continuing professional development programs and established quality assurance audits, professional indemnity insurance became a compulsory requirement, and so on.</P><B>
<P>To summarise, Professional Standards regimes would include comprehensive risk management schemes that benefit the public as well as professionals, reinforcing the accountability of professionals to the communities they serve.</P></B><B><I>
<P>3. Reducing the frequency of complaints and resort to litigation.</P></B></I><B>
<P>Good risk management reduces the need for resort to the legal system. </B>In NSW, following the introduction of a Professional Standards scheme by the legal profession, the number of claims notified against lawyers fell by almost 50 per cent in two years (1999-2000 to 2001-02) from one thousand and seven (1007) to six hundred and fifty (650). </P><B>
<P>Other Public Benefits from a National PSL Scheme</P></B>
<P>There are many associated public benefits from a national PSL scheme, including the following:</P>
<OL start=3>
<OL><B><I>
<LI>Ensuring that professional services in areas deemed by insurers as "high risk", such as financial planning, audit and tax advice, continue to be available to the public, and ensuring affordable professional services continue to be available to a wide range of community, sporting, charitable and not-for-profit organisations.</LI></B></I>
<P>Spiralling premiums are causing some practitioners (particularly at the smaller end of the market) to question whether it is worth it to continue providing certain higher risk services, such as audit. The number of such service providers will contract, and the cost of such services will escalate dramatically. This will significantly impact on business, not-for-profit and community organisations, and all entities that require those services, including superannuation funds. </P>
<P>Addressing the current crisis of spiralling premiums and reduced or non-availability of insurance through a national PSL scheme will protect the public interest by ensuring that competition is preserved and that these services continue to be provided to the public at a reasonable cost.</P>
<P>The Insurance Council of Australia has confirmed that having a limit on the liability of professional service providers reduces insurance premiums, which helps contain the cost of professional services. The public can reasonably expect to benefit from lower premiums paid by professionals by reduced costs for services those professions provide to the public.</P><B><I>
<LI>Creating an environment where professions are encouraged to go beyond the minimum and add significant additional value.</LI></B></I>
<P>The proposed reforms would create an environment that would be far more conducive to firms such as accounting firms providing services that are not presently provided which go beyond the minimum and add significant additional value to the entities they audit.</P><B><I>
<LI></LI>
<LI>Encouraging professions to take on higher risk, small or start-up clients.</LI></OL></OL></B></I>
<P>Under the current liability system all major accounting firms screen their clients carefully before considering accepting engagements, and potential clients that present excessive risks are normally declined audit services. Firms are therefore being encouraged by the current environment to favour low risk companies and to avoid auditing some companies. This is more likely to occur with small or new companies whose relatively higher risk profile means they are becoming increasingly unlikely to secure a quality audit firm, which can affect a company’s standing in the market and may discourage investment in it. </P>
<P>A national PSL scheme and proportionate liability would ensure that firms are more willing to provide services to new and small enterprises, which would benefit from access to the professional expertise of quality audit firms, and the capital markets in general would be supported by the provision of audit services to these new and smaller enterprises.</P>
<P>Yours sincerely</P>
<P> </P>
<P> </P>
<P>John Castles AM LFRAIA</P>
<P>President</P>
<P>Professions Australia</P>
<P>9 December 2002</P>
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