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PI system flawed, FOS admits

Professional indemnity (PI) insurance is not an adequate solution to the problem of losses incurred by retail financial advice clients, according to the Financial Ombudsman Service (FOS).

In a submission to the Senate inquiry into the Australian Securities and Investments Commission's (ASIC’s) performance, the dispute resolution body argued that government intervention is needed to fix failures of the system to provide compensation to aggrieved clients.

“Under the Corporations Act, licensees are required to have adequate compensation arrangements … to date the primary mechanism has been by means of PI insurance policies,” the submission states.

“However, FOS experience highlights that PI insurance is not by itself an adequate response to these problems. PI insurance of the type required to meet the minimums prescribed by ASIC guidance is either not available or very costly for small firms to obtain.”

The submission calls on government to make good on the recommendation of a parliamentary joint committee in 2009 to thoroughly investigate the costs and benefits of different models of a statutory last resort compensation scheme for investors.

“As recent experience continues to highlight the limitations in availability and efficacy of PI insurance to meet the legislative requirements for adequate compensation, in our view the issue of uncompensated loss should be considered again in any broader review of financial sector issues,” the submission continues.

FOS also urges the Senate committee to be alert to instances where a financial services provider goes into insolvency, providing it with a shield against client claims and FOS determinations.

“This is a problem confined to the non-prudentially regulated sector and smaller financial planning firms,” it said.