A resort beyond PI
Financial planners who take the time to read daily newspapers or who follow the proceedings of parliamentary committees could be forgiven for believing they have entered into a time-warp.
Why? Because the most recent headlines pertaining to the latest public hearings of the Senate Economics Committee would leave them believing that the notion of instituting a last resort compensation scheme is something new and different which carries with it the support of a significant element of the banking industry.
Of course, the idea of instituting a last resort compensation scheme pertaining to bad financial advice is not new. It has been debated for much of the last decade, was part of the Future of Financial Advice (FOFA) discussion and has been strongly backed by both the Financial Ombudsman Services (FOS) and the Australian Securities and Investments Commission (ASIC).
And, in fact, there is much to recommend the adoption of a last resort compensation scheme, especially in circumstances where, despite the regulatory requirement for financial planning firms to carry adequate professional indemnity (PI) insurance, significant consumer losses go uncompensated.
It ought to go without saying that those who advocate the introduction of a last resort compensation scheme believe it should be paid for by the financial planning industry with the effect being that planning firms would not only be required to pay expensive PI premiums but also a levy to fund the proposed compensation scheme.
A levy funding a last resort compensation scheme is unlikely to stress the major institutions such as Westpac, AMP or ANZ, but it would certainly impact the viability of lesser-sized firms.
Therefore, in circumstances where the number of companies offering PI insurance has reduced substantially since the regulatory requirement was introduced making obtaining cover increasingly difficult and expensive for many financial planning firms, this begs the question of whether a last resort compensation scheme should replace PI cover entirely?
The number of insurers offering PI in the Australian financial planning market has more than halved since the requirement was introduced and no one debates that those insurers remaining in the market have become increasingly discerning and have imposed significant terms and conditions on the provision of cover. This has given rise to suggestions that the terms and conditions imposed by PI insurers have served to dictate the types of services offered by particular financial planning firms.
Neither the FOS nor ASIC have been suggesting that the PI requirement be dispensed with, but a recent FOS submission made clear that notwithstanding the original legislative and regulatory intent, the use of PI as a compensatory mechanism for financial planning clients has been less than ideal.
To quote a recent FOS submission supporting the establishment of a last resort compensation scheme: "….although ASIC's RG126 minimum requirements seek to ensure that PI coverage is adequate, the cover afforded by PI policies can in practice be subject to significant limitations, for example, where coverage does not include fraud or dishonesty or some of the riskier activities of the licensee".
Given all of the known problems, and notwithstanding the likely broad recommendations of the Senate Economics Committee, the Government must question whether it can sensibly move to introduce a last resort compensation scheme in the absence of a full and thorough review of the workings of the current PI insurance regime.
The upside for the Government in considering any change is that there is now nearly a decade's worth of evidence about how the system has evolved and how it currently works. The recommendations of the Senate Economics Committee will be just another chapter to be considered.
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