The Financial Planning Association (FPA) has rejected the creation of an industry funded compensation scheme of last resort claiming it would paper over the reasons why some advisers fail to pay determinations against them.
The compensation scheme had been floated by the three-member Independent Panel conducting a review into External Dispute Resolution Schemes which had suggested in its Interim Report that it was “…of the view that there is considerable merit in introducing an industry funded compensation scheme of last resort”.
In its response to that report, the FPA – via its submission to Treasury – said a scheme would ignore problems in the pricing of professional indemnity (PI) insurance and recommended that further analysis be made “…as to why there are unpaid determinations, before bolting on a costly scheme that does not actually resolve the underlying reasons as to why there are unpaid determinations”.
The FPA stated that existing PI insurance arrangements could be improved instead of introducing the compensation scheme and that a more competitive market would reduce the cost and increase the quality of PI insurance.
“…there is a high risk that a sub-standard scheme will result if the Panel pushes its proposal”
The association highlighted a previous submission to the Panel in which it outlined how the pending professional standards legislation may reduce the cost of PI insurance.
“There is an argument that professional standards legislation at the Commonwealth level, that limits a professional’s civil liability in return for improved risk management at the practice level and improved standards of conduct, may make the PI insurance market more competitive,” the FPA stated.
This might drive improvements in the quality and price of PI cover, and, in turn, reduce uncompensated consumer losses at the EDR level,” the Association added.
The submission also contained a call for product regulation as a way of reducing unpaid determinations with the FPA suggesting that product providers should be required to identify a target market for their product and ensure the product is suitable for that market.
“This could be justified on the basis that most financial products have a degree of complexity and there is an expectation in the community that product providers will provide a basic level of assistance to consumers deciding whether the product is suitable for them. If this approach were adopted and enforced well, the argument for a compensation scheme would be weakened.”
The FPA was also critical of the lack of scope presented by the Panel around a compensation scheme stating no consensus as to coverage of products or practitioners was presented and whether the scheme would apply retrospectively.
“Given the current difficulties and the existence of an arguably better alternative, there is a high risk that a sub-standard scheme will result if the Panel pushes its proposal.”
