FPA says compensation scheme should not replace regulation
The Financial Planning Association says the Australian Financial Complaints Authority’s compensation scheme of last resort (CSLR) for advice practices would just shift responsibility from the offending party to the entire financial services industry, suggesting tighter professional indemnity (PI) insurance standards would be a better alternative.
A CSLR would see the broader financial services industry pay compensation in cases where the company against which a complaint has been filed becomes insolvent. But the FPA believes that tightening standards on professional indemnity insurance (PI) is the answer, not a CSLR.
“In part, PI insurance is intended to cover liabilities from financial services complaints and ensures that licensees are able to pay compensation when a complaint is made against them,” the FPA wrote in a submission.
“In practice, failure to hold adequate and appropriate PI insurance is a major cause of licensees not paying compensation when it is due.”
While the 2012 St John Review recommended addressing both the quantum and coverage of PI insurance, as well as ASIC taking a more proactive role in monitoring whether licensees are complying with PI insurance obligations, the government has not taken any action on these recommendations.
“A CSLR would transfer responsibility for paying compensation from the party subject to the complaint to the financial services sector as a whole,” the FPA wrote in its submission.
“This is a significant departure from the principle of individual responsibility and should only be taken as a genuine last resort for providing compensation to consumers. A CSLR should not replace proper action by the regulator to hold parties responsible for their own misconduct or poor performance.”
While the FPA believed the best way to ensure consumers are able to access compensation is to address the underlying causes of unpaid determinations, the body did recommend that a CSLR mirror AFCA’s compensation limits and that its funding reflect the risks of different financial services classes while establishing a “broad and robust” funding base.
“To promote equity, the division of funding between classes should have some relevance to the level of risk in each class and the potential exposure it brings to the CSLR,” the FPA wrote.
“This is particularly important for the managed investment scheme sector, where the consequences of a single failure could include substantial compensation payments to affected consumers.”
The creation of a CSLR was a recommendation from the royal commission, and AFCA holds that a “broad-based CSLR that holistically covers the financial services industry” would be vital to restoring consumer trust and confidence in the financial services industry.