Compensation Scheme Should Target Financial Advice

A compensation scheme of last resort (CSLR) focused on the financial advice sector is required to deal with the high level of unpaid dispute determinations, a government appointed panel has claimed.

Professor Ian Ramsay

The panel, headed by Professor Ian Ramsay has already recommended the formation of the Australian Financial Complaints Authority, but has argued in a supplementary final report, released just before Christmas, that the formation of any CSLR should focus on the financial advice sector first

“The evidence provided by the Financial Ombudsman Scheme of unpaid External Dispute Resolution (EDR) determinations in the past show that over 90 per cent of unpaid EDR determinations, by value, relate to financial advice,” the report stated.

“The evidence provided by FOS of unpaid EDR determinations…show that over 90 per cent…relate to financial advice”

“Therefore, the Panel recommends that a CSLR should initially be restricted to financial advice failures where a financial adviser has provided personal and/or general advice on ‘relevant financial products’ to a consumer or small business,” the report added.

The report stated that under these terms only advice given by a ‘relevant provider’ defined under of the Corporations Act, ie: financial advisers, would be covered by a CSLR.

The panel also recommended that funding for a compensation scheme should come from the financial services firms that provides the services covered the scheme.

It did not, however, provide any firm recommendations on how the funding would work apart from requiring that membership of the scheme and contributions to its funding should be a condition of licensing for AFSL holders.

The report also stated the CSLR scheme was required as current professional indemnity (PI) insurance arrangements did not always meet dispute resolution determinations and that changes to PI insurance arrangements were unlikely to deal with the problem of uncompensated losses.

It went on to state that “…PI insurance exists for the benefit of the financial firm. Consumers and small businesses do not have direct recourse to payments made by the insurer to the financial firm under the insurance policy”.

Additionally there was “…a potential misalignment between the types of claims covered by a PI insurance policy and the conduct that is subject to a decision of an EDR body, court or tribunal,” according to the panel’s report.