The Federal Government has moved further towards the adoption of a last resort compensation scheme for financial services consumers, tasking the External Dispute Resolution (EDR) Review to specifically examine such a scheme.
Importantly, the processes of EDR panel will see it traverse the effectiveness of the current professional indemnity (PI) insurance regime with the panel already noting shortcomings in the existing arrangements including the exemption which has resulted in a large number of firms not relying on PI insurance to compensate their customers when they suffer financial loss.
The Minister for Revenue and Financial Services, Kelly O’Dwyer has confirmed the release of a supplementary issues paper to be addressed by the EDR Review panel plus an amended terms of reference requiring the panel to “make recommendations on the establishment, merits and potential design of a compensation scheme of last resort and consider the merits and issues involved in providing access to redress for past disputes.
The issues paper, released by Treasury on Thursday, said that the issues were “of significant public interest given the scale of financial losses suffered by Australian investors in recent years”.
It said estimates suggested that over 80,000 people had been affected with losses totalling more than $5 billion (or $4 billion after compensation and liquidator recoveries).
“For those individuals who have suffered losses, the effect on their lives can be devastating,” the issues paper introduction said. “Additionally, where those individuals have not been able to receive compensation or even have their case heard, this undermines trust and confidence in the financial system.”
On the issue of PI insurance, the panel noted in the discussion paper that there was a “paucity of data about the PI insurance market, in particular, the policies held by financial services licensees and credit licensees.
On the issue of funding the scheme, the discussion paper notes that, internationally, compensation schemes of last resort in the financial sector are industry funded, but goes on to note “the possibility of other funding models, such as those which have a degree of government involvement”.
Looking at legacy unpaid EDR resolutions, the discussion paper cited Financial Ombudsman Service (FOS) data and noted that only a very small percentage of FOS members were involved with non-compliance.
However, it noted FOS data to state that the top three categories of non-compliant financial firms were:
- Financial planners and advisers (53 per cent)
- Operators of managed investment schemes (13 per cent)
- Credit providers (11 per cent).
