A consultation into professional indemnity insurance needs to take place before the Government can pass the compensation scheme of last resort, according to the Stockbrokers and Financial Advisers Association (SAFAA).
In a submission to the Senate Standing Committee on Economics, chief executive, Judith Fox, said the organisation supported the scheme but that it had “serious concerns” with how it had been designed.
Fox said a review into PI insurance was first necessary to understand the source of unpaid determinations, of which financial advice was least likely to be the cause of unpaid determinations. Data used to form the CSLR proposal was based on data from 2016, pre-dating the Hayne Royal Commission, when financial advice complaints were higher and Fox recommended this was updated with more recent figures.
“The design of the CLSR excludes recognition of ASIC’s role in ensuring companies have sufficient capital adequacy and appropriate professional indemnity insurance (PI insurance) to meet their internal and external dispute compensation obligations. It is vital to understand the source of unpaid determinations both to reduce the risk to consumers of unpaid determinations and clarify if the design of the CSLR is actuarially sound.
“We note that the minister is on record as saying that ‘to ensure that the CSLR truly operates as a scheme of last resort, the Government will also consult on proposals to enhance the effectiveness of professional indemnity insurance in responding to compensation claims’.
“However, SAFAA is strongly of the view that consultation on the effectiveness of PI insurance needs to take place before the CSLR legislation is passed, given its importance in clarifying the source of unpaid determinations and reduction of risk to consumers.”
There was also the risk of those firms which were most likely to have unpaid determinations were incentivised to “indulge in moral risk” as the cost of their failure would be borne by others.
“The scheme will collect levies in order to pay unpaid AFCA determinations, which will be paid by entities with no connection to those unpaid fees. This creates moral hazard, whereby the entities most likely to create an unpaid determination have an incentive to indulge in moral risk, knowing that the cost of their risk-taking or bad-decision making is borne by others.
“That is, they can refuse to deal with client complaints in good faith or fail to pay an AFCA determination, knowing that others have to bear the cost of that unpaid determination.”