This week, the FPA made a submission to the government regarding the proposed implementation of a last resort compensation scheme – a fund that would be set up and paid for by financial services institutions to compensate consumers affected by financial misconduct.
In its submission to the government, the FPA advised against such a fund, saying it does not actually address the underlying issues and it would be an unfair levy on smaller financial advice businesses.
“In 2011, the government appointed Mr Richard St John to undertake an extensive independent review of the consumer compensation system. In his final report, Mr St John concluded that it would be inappropriate and possibly counter-productive to introduce a CSLR without first strengthening the existing compensation arrangements,” the FPA said.
It is not known whether or not ASIC or FOS have attempted to take action in cases where it was found consumers were not paid compensation, the FPA said.
“It is unclear whether unpaid determinations are a problem merely because existing mechanisms to adequately deal with them haven’t been utilised to their full potential or whether there is a failure of professional indemnity insurance as a mechanism to provide the capacity to provide adequate compensation,” the FPA said.
“Instead of a national compensation fund the framework should be set to make each financial services provider individually responsible and financially accountable to the end consumer for the provider’s legal and ethical obligations.”
“It appears that advice failures are being used as a proxy for failures elsewhere in the financial services industry, which unless fixed will mean that any proposed scheme is potentially exposed to the risk of the whole system.”
The compensation scheme would also put smaller advice practices at a great disadvantage and raise the barrier to entry into the industry. These businesses are already preparing for increased regulatory costs such as the ASIC funding levy and FASEA funding, the FPA said.
“We recommend that further analysis or inquiry is conducted as to why there are unpaid Financial Services Ombudsman determinations, before bolting on a costly scheme that does not actually address the underlying reasons as to why there are unpaid determinations,” the FPA said.
In opposition to the FPA’s stance, the Australian Bankers’ Association has previously voiced support for the scheme. While the ABA was initially against the idea – reluctant to “pick up the tab” for other organisations’ customers – it now advocates the scheme as an important facilitator of consumer trust.
