TheFinancialPlanning Association(FPA) will consider backing a proposal to set up a national scheme, possibly funded by an industry levy, to compensate investors for losses suffered at the hands of unscrupulous financial services providers.
The proposal is just one of a range of options the FPA is considering endorsing as part of a bid to ensure consumers have access to adequate compensation arrangements.
Under the Financial Services Reform Act (FSRA), due to come into effect in March 2004, all financial planners need to provide clients with access to ‘adequate compensation arrangements’.
However, the FSRA does not spell out exactly what the term ‘adequate compensation arrangements’ actually means, prompting the Federal Government to call for submissions on the topic.
The FPA is in the final stages of consulting its members before making its recommendations to the Government by the end of this month.
Other options being considered by the FPA include leaving financial planners to fall back on their own professional indemnity (PI) cover to meet the ‘adequate compensation arrangements’.
However, FPA national manager of policy and government relations Con Hristodoulidis says this option may not be viable in the current environment, where many insurers are only providing limited PI cover to financial planners.
“The difficulty with PI is obviously going out and getting a premium because the insurance industry is putting exclusions [into insurance contracts] that are not warranted,” Hristodoulidis says.
The FPA is also assessing an option where a national industry scheme is used to provide compensation to investors only in the areas not covered by an adviser’s own PI insurance.
Hristodoulidis says the FPA is still grappling over how a national scheme would be funded, particularly whether it would need to impose a levy on the industry on an ongoing basis, or only in response to specific requests for compensation.
But he says the Government will have to find a solution to the adequate compensations arrangements question, or face putting many financial planners out of business.
“You don’t want to have a situation that because of the adequate compensation provisions in the act, it means [financial planners] going out of business,” Hristodoulidis says.
