The need for a compensation scheme of last resort is highly debateable in circumstances where most of the problems lie with 44 separate, small and under-resourced licensees who proved unable to comply with 177 Financial Ombudsman Service (FOS) determinations and are no longer in business.
That was the assessment of In-Focus Wealth Management managing director, Darren Steinhardt who pointed to flaws in the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, particularly the imposition of a Compensation Scheme of Last Resort.
In a discussion paper to be published in Money Management, Steinhardt said the culprits which had caused the problems were not the banks, financial institutions or the larger, well-resourced licensees and dealer groups.
“They are the 44 separate, small and under-resourced AFSLs who have been proven unable to comply with 177 FOS determinations which affects 246 customers; these 44 AFSLs are no longer in business,” he wrote.
“Each of these culprits was a small/self-licensed/boutique AFSL who, when a client complaint/compensation was awarded against them, found that their professional indemnity (PI) insurance policy didn’t respond (ie inadequate client compensation arrangements, first breach of licence conditions) so the funding of the determination was subject to the strength of their balance sheet,” Steinhardt wrote.
“A lack of financial resources (ie inadequate financial resources, second breach of license conditions) then meant that the AFSL could not pay its debts/obligations as and when due (insolvency test) which included the client compensation, receivers were then appointed and its all over,” he discussion paper said.
Looking at the reasons for the situation, Steinhardt argued that just having a PI insurance policy did not automatically mean that the licence condition of adequate client compensation was satisfied, further he argued that too few self-licensed firms understand the value of having professional standards personnel keeping them on course.
Further he argued that the current “financial resources” license condition is too low in today’s litigation-fuelled environment where, for minimal investment, planning firms can go out and take on responsibility for advice on many millions of dollars.
Steinhardt said the problem with the Royal Commission’s compensation scheme of last resort recommendation was that it was addressing the symptoms and not the root cause of the problem with the likely result that firms operating in the industry could expect to pay at least another $1,000 a year in industry funding to underwrite the compensation scheme.
