The Federal Government has been provided with the ammunition necessary to pursue legislation implementing a financial services compensation scheme of last resort.
But importantly, it is likely that such a compensation scheme would be heavily targeted and funded by the financial planning industry.
The Minister for Revenue and Financial Services, Kelly O’Dwyer has released the supplementary final report of the so-called Ramsay Review which has recommended the implementation of a a “limited and carefully targeted compensation scheme of last resort (CSLR).
While noting that most financial services firms meet their obligations under the determinations of external dispute resolution (EDR) bodies such as the Financial Ombudsman Service (FOS), the Ramsay committee stated: “Nevertheless, the Panel also recognises that while unpaid determinations represent a very small proportion of total EDR determinations the impact on consumers and small businesses can be significant and can erode confidence in the dispute resolution processes and the financial system more broadly”.
“To fill what the Panel regards as a gap in the dispute resolution framework, the Panel has recommended that a limited and carefully targeted CSLR be introduced for future unpaid compensation in parts of the financial services sector where there is evidence of a significant problem of compensation not being paid,” it said.
“The evidence provided by FOS of unpaid EDR determinations in the past show that over 90 per cent of unpaid EDR determinations, by value, relate to financial advice,” it said. “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.”
It said this meant that only advice given by a ‘relevant provider’, as defined in section 910A of the Corporations Act, would be covered by a CSLR.
The committee report said relevant financial products would include, for example, financial advice on investments in managed investment schemes, superannuation and banking products that were not basic banking products.
“The Panel also recommends that a CSLR should be designed to be scalable to cover other types of financial services should significant problems with unpaid compensation arise in the future. This should include a robust mechanism to ensure that the implications of future extensions are fully considered,” it said.
“The Panel considers it essential that a CSLR be the last resort within the financial system’s dispute resolution framework. That is, a CSLR should act as the final safety net to ensure consumers and small businesses are able to receive compensation after all other avenues have been exhausted.”