Last resort compensation – is anyone listening?

Mike Taylor writes that a broad cross-section of the financial services industry has voiced its concerns about a compensation scheme of last resort but few appear to be listening.

If the Minister for Revenue and Financial Services, Kelly O’Dwyer and her advisers have taken the time to read the stakeholder submissions filed with respect to implementing a compensation scheme of last resort (CSLR) they will discern a deep divide between consumer groups and regulators on one side and industry participants on the other.

While the Australian Securities and Investments Commission (ASIC) and the Financial Ombudsman Service (FOS) together with consumer groups such as Choice have been advocates for a last resort compensation scheme, the major superannuation and financial planning groups have made clear they are bitterly opposed.

FOS and ASIC have been advocates of imposing a last resort compensation scheme because of the growing number of unpaid determinations which, according to the latest available FOS information, involved $13,909,635.50 which had not been returned to affected consumers.

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One of the most recent manifestations of this industry opposition was the submission filed by the Financial Planning Association (FPA) which made clear the organisation saw a distinct lack of equity in the arrangements being proposed by the External Dispute Resolution (EDR) Review Panel.

Sitting at the core of the FPA’s opposition is a belief that responsibility for funding such a scheme needs to be imposed on all industry participants, not just a few.

In what represented a direct reference to financial product manufacturers and distributors, the FPA submission stated: “Consumer protection and appropriate consumer compensation is the responsibility of all participants who have a role in causing, or an influence in allowing, consumer detriment”.

“Until the regulatory and compensation framework is set to make each provider individually responsible and financially accountable to the end consumer for the provider’s legal and ethical obligations, the FPA is unable to support the introduction of a compensation scheme of last resort,” the submission said.

It said that although the FPA understood the reasons for some stakeholders wanting to introduce a CSLR, “we recommend that further analysis or inquiry is conducted as to why there are unpaid Financial Services Ombudsman (FOS) determinations, before bolting on a costly scheme that does not actually address the underlying reasons as to why there are unpaid determinations”.

Reflecting the perspective of the superannuation industry, the Association of Superannuation Funds of Australia (ASFA) has opposed the last resort compensation scheme for somewhat different reasons – it does not believe superannuation funds should be made to pay for the mistakes of other sections of the financial services industry.

The ASFA submission said the organisation “does not support any proposed industry-wide compensation scheme that has the potential to involve cross-subsidisation by the APRA [Australian Prudential Regulation Authority]-regulated superannuation sector of losses incurred within other sectors”.

“The proposed compensation scheme raises the prospect of an adverse impact on the APRA-regulated superannuation sector,” the ASFA submission said. “Depending on the design of the scheme, there would appear to be the potential that other sectors of the industry may incur costs in relation to a compensation scheme of last resort – whether through direct contribution toward a grant of compensation, or an indirect contribution toward funding the administration of the scheme.”

In short, ASFA believes that superannuation funds are already tightly regulated under the Superannuation Industry (Supervision) Act and that, in any case, the level of unpaid compensation claims in the superannuation industry are nowhere near as high as those which exist in the space overseen by the FOS or the Credit Industry Ombudsman (CIO).

“Past instances of unpaid SCT determinations have been infrequent and quickly addressed. On those rare occasions where fraud or theft has occurred to such an extent that a fund’s ability to benefit members was jeopardised, these have been effectively addressed through the operation of the existing compensation scheme for APRA-regulated superannuation, Part 23 of the Superannuation Industry (Supervision) Act 1993 (SIS Act),” it said.

“‘Phoenix’ behaviour, which has been observed within the broader financial advice sector, has not been a concern in the APRA-regulated superannuation sector and is less likely, given the substantial regulatory barriers to securing registrable superannuation entity licensee status,” it said.

The industry funds-backed Australian Institute of Superannuation Trustees (AIST) has put a similar argument, maintaining that a scheme of last resort is not required for superannuation-related complaints because uncompensated losses are not an issue within the sector because of the regulatory environment and the provisions of the SIS Act.

The AIST acknowledged that unpaid compensation could be an issue in other parts of the financial sector, but suggested this could be addressed by exploring Australian financial services licensing obligations, including the adequacy of professional indemnity insurance.

Irrespective of the industry’s misgivings, the scale of unpaid determinations appears to have convinced the Government that there is more to be won than lost in implementing a last resort compensation scheme with the only question being how many sections of the financial services industry are made to pay the bill.