Contents

Chapter 8
Liability of professional service providers and advisers

Operation of capped liability in Australia

The various Australian schemes

8.28It is relevant to consider the Australian experience with capping. This is not only because Australia is our closet neighbour and largest international market, but also because Australia is the only country to develop a widespread application of capped liability for professionals.

8.29New South Wales first developed state-authorised limitation schemes in the 1990s.141 Such schemes later formed a standard component for a commonwealth and state consensus plan for tort and related business law reform.142 All states and territories, except Tasmania, agreed to enact uniform Professional Standards Acts. These allowed professional bodies in each state to develop and propose schemes covering their membership. In return for maintaining various scheme requirements aimed to encourage high professional standards, the maximum liability of members would be capped.143 Schemes are submitted for approval to the relevant Professional Standards Council for the state or territory. In practice the states and Commonwealth operate a single Council with common membership. Where a state capping scheme is approved for a professional group, the federal government may also prescribe analogous rules to cover potential federal liability arising within the state.
8.30The actual caps on liability vary between professions but are usually standardised across states. Auditors have had the highest potential liability and cap, with a minimum cap per event of $1 million per engagement, where reasonable fees were less than $100,000; a cap of 10 times the reasonable fees for the engagement, up to a maximum cap of $75 million.144 The “10 times fees” approach is not applied to other accounting work, to which caps on liability of $1 million, $10 million or $20 million apply, depending on the size and income of the firm.145 Other groups, for example solicitors, have sought approval to lower their standard cap per event for smaller firms from $2 million to $1.5 million, with the cap for larger firms (more than 20 principals or more than $10 million fee income) remaining at $10 million.146 There is no sliding scale of increasing maximum, but the scheme does provide for a very large firm to apply for a higher maximum for all or a class of business. The engineers’ schemes impose caps in four steps, from $1.5 million up to $20 million, depending on the income of the sole trader, partnership or body corporate. The $20 million cap applies to bodies with income over $10 million.147 Again, truly large firms with turnover in excess of $20 million can apply to have an appropriate cap set.
8.31Apart from New South Wales, which introduced legislation to permit capping schemes in 1994, most schemes were implemented progressively by 2007 and 2008. One of the criteria for schemes is that they may be approved for not more than five years. Professional bodies must then apply again for a “new” scheme. The Professional Standards Councils have indicated that most, if not all, schemes have been or will be renewed in 2012 and 2013.148 Renewal is not automatic. At least one major accounting professional body, the Institute of Chartered Accountants of Australia ICAA, had its application for renewal of its scheme in the Australian Capital Territory declined in 2013, and other state ICAA schemes expired as they reached their termination dates.149

8.32It is difficult to tell what practical impact capping is having in Australia, primarily because it was introduced at approximately the same time as proportionate liability. Fears of a professional insurance crisis in Australia have receded since 2002 and 2003 but it remains debatable whether this is because of proportionate liability, and capped liability for professionals, or simply the retreat of a temporary panic in the market. Professional Standards Australia indicates that the considerable majority of claims covered by each capping scheme are for amounts falling below the applicable cap. Thus it may be that the main effects of the capping schemes are educative, and provide stronger incentives for groups of professionals and their governing bodies to develop and maintain high professional standards.

Capping for New Zealand professional advisersTop

8.33With the exception of auditors, which we discuss separately below, we do not consider there is a strong case for introducing capping schemes like the Australian models. Unless caps were set in statute, which we would not recommend, introduction of capping schemes would require an extra level of administration by professional bodies, as well as supervision and approval of schemes by either the Crown or some entity selected or created to fulfil the monitoring and approval roles.150 Given the differences between Australian and New Zealand conditions and the lack of evidence of the actual effect of caps, there is not a substantial case to build this infrastructure.
8.34More importantly, New Zealand is not in the situation that Australia appeared to face around 2002. New Zealand professionals requiring indemnity insurance can acquire it, presumably at prices they can reasonably meet as part of their costs of doing business. In addition New Zealand does not have a professional standards gap that capping schemes might help to bridge. Professional bodies and government continue to develop appropriate regulatory structures for particular professions as appropriate. Unlike Australia, in New Zealand there is usually only one national body per profession, with national standards, discipline and professional development already well in hand. Furthermore, some professions in New Zealand are also subject to statutory regulation, including lawyers and conveyancers, and auditors.151

8.35We do not consider that the existence of the Australian capping models necessarily raises a CER argument for professions generally. Apart from some auditors, and perhaps a small segment of consulting engineers who regularly compete and operate in Australia and New Zealand, the various professionals markets for the two countries remain separate. Even if a New Zealand professional does conduct business in Australia from time to time, or vice versa, the differences in liability provisions are unlikely to cause them or their customers significant difficulties. We therefore conclude that there is no need to harmonise or standardise arrangements in the narrow area of liability limitation for professional service providers and advisers.

141See for instance Professional Standards Act 1994 (NSW).
142Introduced from 2002 after the collapse of HIH Insurance, one of the major professional indemnity providers in Australia.
143Generally, to qualify for approval and therefore capped liability, a scheme must require compulsory professional indemnity insurance or equivalent approved assets held, up to the relevant capped liability level; satisfactory admission standards and compulsory continuing professional development (CPD) for covered members; a code of ethics; a complaints and discipline system accessible to the public/consumers; ongoing risk management programmes by the professional body to track claims, complaints and discipline, and CPD outcomes; and reporting annually on all of the above, to the Professional Standards Council.
144Initial schemes allowed for caps as low as $500,000, the lowest limit allowed for in the legislation. But some significant changes have occurred in some recent Australian capping schemes. The latest capping scheme from CPA Australia for its New South Wales members (in force since October 2013) has raised the “minimum” cap to $2 million for firms with fewer than 20 principals and total annual fee income under $10 million per annum; the same $10 million cap as previously for firms with fee income less than $20 million per annum and fewer than 60 principals; and a cap of $75 million for audit firms with income over $20 million or more than 60 principals; or the existing $20 million cap for “large” non-audit firms. The upper caps have not moved – but the base and intermediate levels have been lifted significantly, in part by elimination of the previous “10 x fees” multiplier for auditors.
145See for example Professional Standards Councils “Institute of Chartered Accountants in Australia Professional Standards Scheme (NSW)” (2013, Draft) <www.psc.gov.au>.
146Law Society of New South Wales “Scheme” (Notified 8 February 2012) <www.psc.gov.au>.
147Professional Standards Councils, above n 137.
148“Professional Standards Council” <www.psc.gov.au>.
149The Professional Standards Council announced in May 2013 that it had not approved the proposed scheme for ICAA members in ACT: see Professional Standards Councils “Information regarding expiry of ICAA schemes in ACT, QLD, SA and VIC” (2013) <www.psc.gov.au>. Temporary schemes are being put in place, and the Professional Standards Council has asked the ICAA to reconsider important features of proposed long term replacements, including the minimum and maximum caps, and the “times 10” multiplier, for caps below the maximum.
150This is performed in Australia by the Professional Standards Councils.
151Lawyers and Conveyancers Act 2006; Auditors Regulation Act 2011.