Problems with professional indemnity (PI) insurance continue to be a major cause of unpaid determinations and the Government has not taken action to address the issue for nearly a decade, according to the Financial Planning Association (FPA).
In a submission responding to the Treasury’s discussion paper on a Compensation Scheme of Last Resort (CSLR), the FPA repeated its concerns about pursuing such a regime arguing that the Government must, at the same time, address the role of PI insurance in the regulation of financial services in circumstances where failure to hold adequate PI has been a major cause of licensees not paying compensation when it is due.
“The FPA continues to believe that the first step in ensuring consumers are able to access compensation is to address the underlying causes of unpaid determinations. The Government must address the role of professional indemnity (PI) insurance in the regulation of financial services,” it said.
“Financial services firms and practitioners are required to hold PI insurance as a condition of their license. In part, PI insurance is intended to cover liabilities from financial services complaints and ensure that licensees are able to pay compensation when a complaint is made against them. In practice, failure to hold adequate and appropriate PI insurance is a major cause of licensees not paying compensation when it is due.”
The submission said the St John review considered the issues in 2012 and made recommendations to improve the effectiveness of PI insurance including addressing the quantum and coverage of PI insurance and recommending ASIC take a proactive role in monitoring whether licensees are complying with their PI insurance obligations.
“To date, the Government has not taken any action on these recommendations and problems with PI insurance continue to be a major cause of unpaid determinations,” it said.
“It said a CSLR would transfer responsibility for paying compensation from the party subject to the complaint to the financial services sector as a whole.
“This is a significant departure from the principle of individual responsibility and should only be taken as a genuine last resort for providing compensation to consumers. A CSLR should not replace proper action by the regulator to hold parties responsible for their own misconduct or poor performance.”