Professional standards legislation
Institute schemes
1) Liability
(including: liability not capped, occupational liability, liability arising from breach of Commonwealth legislation, liability arising in another jurisdiction, and when is liability capped?)
2) Who benefits from the cap?
(including: participating members, and practice entity membership)
3) Professional indemnity cover
(including: Institute professional indemnity requirements, minimum cap and limitation amount/monetary ceiling)
4) Disclosure
Professional standards legislation
Professional standards legislation (PSL) is now in force in all Australian jurisdictions. This legislation enables the Professional Standards Council (PSC) to approve a scheme which will limit the civil liability of members of a professional association in exchange for a commitment that the members will hold professional indemnity cover of a certain standard and the association will work to improve professional standards of members.
The legislation - Defines what liability is capped
- Sets out who can benefit from the cap – i.e persons to whom the scheme applies
- Sets out the requirements for a person to get the benefit of the cap
- Professional indemnity cover to limitation amount
- Disclosure on business stationery in some states/territories
- Prohibits opting out or contracting out
Institute schemes
The schemes themselves set out the details of how the cap will apply to members. They specify:- Which members will benefit (participating members)
- The minimum caps
- The way in which the caps above the minimum cap are calculated (limitation amount) up to the ultimate cap which is called the monetary ceiling.
- The circumstances when a member may apply to the Institute to apply its discretion to specify a higher maximum amount of liability than is set out in the scheme.
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1) Liability
Liability not capped
PSL limits occupational liability and excludes liability for damages in certain cases. More>
Occupational liability
A key element of the legislation is that it provides that liability can only be limited for occupational liability (i.e. the act or omission of a member acting in the performance of his/her occupation).
The court will decide whether it is an Institute member who has responsibility for the act or omission on the basis of the circumstances in each case. To ensure that they are not exposed to unlimited liability, members should ensure that all persons and entities against whom a claim might be made are Institute members.
The court will also decide whether an activity is one which is 'in the performance of his or her occupation' as a member of the Institute. In deciding whether a service meets this definition, the court is likely to look at all relevant evidence that the service is one that is generally accepted as being within the scope of services provided by the accounting profession. This evidence might include the definition of 'public accountancy services' in article 2(f) of the Institute's Supplemental Royal Charter.
Liability arising from breach of Commonwealth legislation
In October 2007, the Commonwealth prescribed the New South Wales and Western Australia schemes. Under the Treasury Legislation Amendment (Professional Standards) Act 2004, the operation of a state scheme will be extended to cover liability arising from breaches of the Trade Practices Act 1974(Cth) where that scheme has been prescribed by the Commonwealth. It is expected that other Institute schemes will be prescribed after they have been gazetted in each of their states.
Liability arising in another jurisdiction
PSL is state based legislation, intended to limit the occupational liability of a member in relation to a claim or cause of action in that state, or jurisdiction. When the NSW Accountants Scheme was operative, it was only members resident in NSW who were participating members of that scheme.
In order to provide national coverage under a single scheme, the Standing Committee of Attorneys-General (SCAG) has agreed to amend state and territory PSL to incorporate mutual recognition provisions. To date these amendments have only been made in NSW but are expected to be implemented in other jurisdiction over the next year. The effect of these amendments will be that those Institute members who are participating members of an operative scheme in one state will have the benefit of the cap in all other jurisdictions.
When is liability capped?
Under PSL, liability is limited in relation to an act or omission which occurred during the period when the scheme is in force regardless of whether the scheme ceased to be in force at the time when the proceedings are instituted.
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2) Who benefits from the cap?
Participating members
The Institute schemes specify CPP holders, affiliate and practice entity members, other than financial services licensees as participating members of the schemes. The schemes apply to all CPP holders including those members who hold a nil rate or concessional CPP.
Members who hold a financial services license are excluded from the limitation of liability in relation to all services provided, including those which do not require an AFS license.
If a member is responsible for the act or omission which is within the scope of services provided by the accounting profession and adequate PI cover is held then the following participating members get the benefit of the cap:- CPP holders & affiliate or practice entity members other than AFS licensees who are partners of the participating member
- Non-member partners and employees as long as they are not entitled to membership
If a non-member is responsible for the act or omission then the liability is unlimited and members will not get the benefit of the cap on liability.
Practice entity membership
PSL in all jurisdictions now applies to incorporated entities. Members providing services through incorporated entities or other structures against which proceedings might be brought should consider practice entity membership for those entities. This will ensure that where the entity is the primary defendant in any proceedings, as a member the entity and its officers will get the benefit of the cap on liability.
It should be noted that not all practice entities through which a member chooses to practice are capable of becoming practice entity members. The entity must be capable of utilising the description 'Chartered Accountants' in accordance with the Institute's regulations.
Institute approval of a form of practice structure prior to 2007 does not constitute approval of practice entity membership.
Read more information about practice entity membership here
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3) Professional indemnity (PI) insurance cover
PSL requires that to get the benefit of the limitation of liability, members must be able to satisfy the court that they have the benefit of PI cover and/or business assets to the level of the cap for the service, which is the basis of the cause of action.
Because of the risks associated with relying on business assets the Institute requires that all CPP holders and affiliate and practice entity members hold adequate PI cover. The scheme sets out the amount of cover each member or practice will need.
Institute PI requirements
The Institute's Regulation on PI, Appendix to Regulation 4 has been amended as follows:
7PI.3.5 The Limit of Indemnity
(i) The sum insured for the Practice must be:
(a) not less than either the limitation amount or monetary ceiling set out in the Institute scheme current at the time of PI policy renewal
or, in a state where there is no limitation of liability scheme in place,
(b) not less than $500,000
Minimum cap
The PSL provides that liability for damages will only be limited where the damages exceed the minimum caps specified in the Institute scheme for all categories of service as follows:- $500k to 30 June 2008
- $750k from 1 July 2008 to 30 June 2009
- $1m From 1 July 2009
These minimum caps apply where the engagement fee for the relevant service is less than $50k up to 30 June 2008, $75k from 1 July 2008 to 30 June 2009 and $100k from 1 July 2009.
This minimum cap on liability also represents the minimum level of PI cover required to get the benefit of the cap on liability and also to meet the requirements of the Institute’s Regulation 7PI.3.5.
Limitation amount
Beyond the minimum cap, the Institute schemes set out the limitation amount and monetary ceiling according to the category of service provided. More>
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4) Disclosure
PSL in all states and territories requires that all documents provided by a member whose liability is limited by a scheme to a client or prospective client must carry a statement to that effect.
Under Victorian, Queensland and Tasmanian legislation the scheme does not limit the liability of a member if this disclosure is not provided. Under PSL in other states, failure to provide the disclosure of the member's limitation of liability under the scheme constitutes an offence carrying a penalty.
Regulations in New South Wales, Western Australia, South Australia and Queensland have prescribed the form of the disclosure statement as:
'Liability limited by a scheme approved under Professional Standards Legislation' *
The Institute recommends that this form of wording be adopted by members in jurisdictions where the form of notification is not prescribed.
Where the business stationery of a practice is shared with an AFS licensee within the practice, the Institute recommends that the following be added to the above disclosure.
*Other than for the acts or omissions of financial services licensees
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Last updated: 24 December 2007
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