Other sectors of the financial services industry should not be made to fund client losses generated by financial advisers under a compensation scheme of last resort (CSLR), according to the Financial Services Council (FSC).
In a submission to the Treasury on the proposed scheme, the FSC said it supported a targeted ‘mid-coverage’ scheme which included the sectors which historically had unpaid determination – “namely financial advice, investments and credit”.
“The targeted CSLR should be funded solely by the sector responsible for the unpaid determinations via Sector Specific Funding. Sector Specific Funding should take into account the historical experience of unpaid determinations (that is, whether or not and if so the extent of, historical unpaid determinations in that sector) to identify appropriate funding requirements for each sector, until a fulsome risk-based funding approach can be implemented in the CSLR,” the FSC submission said.
It argued that sector specific funding should be deep enough to meet estimated costs including expected variability across different periods, but not require cross-subsidisation from other financial services sector.
The submission said that to facilitate sector specific funding and to ensure that the CSLR was sustainable it was essential that outstanding regulatory gaps in the advice licensing regime were addressed, particularly relating to professional indemnity (PI) insurance and capital requirements.
The submission said the FSC believed there needed to be greater oversight of PI insurance requirements by ASIC and the introduction of appropriate capital requirements for advice licensees, noting that the current cash needs requirements set out by ASIC only required sufficient cash to meet 12 weeks of liabilities.
“This latter measure of introducing appropriate capital requirements need not result in prudential supervision. Rather it can simply require minimum cash or liquid capital requirements as part of licence conditions. These assets are then available to meet any consumer claims. This can be built up over time to streamline the introduction of such requirements,” it said.