Australia’s financial services associations have taken it upon themselves to offer significant changes to the country’s compensation system, with one body proposing the development of a top-up group professional indemnity (PI) insurance policy.
The Financial Services Council (FSC) has proposed PI insurance cover that will cover compensation that is deemed appropriate but which is not generally covered though the existing PI insurance market, such as run-off cover or fraud committed by an individual licensee.
“This group policy would achieve the objective of ensuring a licensee is able to compensate retail clients in the event of a breach and where the offending licensee has ceased trading, become insolvent or otherwise has insufficient assets or compensation is not available under a licensees individual PII (professional indemnity insurance) policy,” the FSC said in its government submission.
It said the policy would be ‘activated’ once all other avenues of recovering the compensation from the offending licensee had been exhausted.
“This approach will mean that participants in the financial services industry have more of their own funds at risk in the event of a breach, better aligning the interests of consumers and financial services providers,” the submission said.
In response to a proposal by the Financial Ombudsman Service (FOS) to form a Financial Services Compensation Scheme (FSCS), the FSC said the proposed 1 per cent revenue levy on licensees would not address the critical issues in regards to cross-subsidisation or moral hazard.
“Any funding model therefore needs to address these issues in a manner which avoids doubling up and which allows for licensees to meet any enhanced requirements through alternative means,” it said.
It said this could be partially achieved by exempting the Australian Prudential Regulation Authority (APRA)-regulated entities from the operation of the scheme.
“This approach reflects current government policy whereby under the corporations relegations, general insurance companies, life insurance companies and authorised deposit-taking institutions regulated by APRA are exempt from the compensation requirements,” it said.
In its submission, the Association of Superannuation Funds of Australia (ASFA) said a compensation scheme must be “statutory and last resort”.
“In ASFA’s view it is critical that, within such a scheme, the providers of financial services and products be segregated into different classes with respect to the types of products or services they provide,” ASFA said.
“It is also critical that ‘moral hazard’ be addressed by making it compulsory that all financial providers have adequate professional indemnity insurance.”
In regard to superannuation funds, it said it would be inappropriate for super funds to be levied other than where misconduct had caused a superannuation fund to fail.
As part of its submission, the FPA said it was unable to support a proposal for a FSCS that appeared to attach “further liability and obligation” to the financial advice community alone or at least in a disproportionate way to other participants.
“The FPA strongly believes that the debate must encompass all in the financial services community and we must all, as participants, take responsibility for our actions,” the submission said.
