Treasury releases review of compensation arrangements

Current default compensation arrangements for retail clients rely largely on professional indemnity (PI) insurance, and provide no guarantee that retail clients will be able to recover compensation to which they may be entitled.

That is one of the observations made by financial services expert Richard St John in the Government’s newly launched consultation paper on compensation arrangements for retail investors.

St John said the problem for consumers arose when a provider did not have recourse to professional indemnity insurance cover and did not have the financial capacity to pay compensation – which may be the case if the provider has ceased to trade or has become insolvent.

The consultation drew attention to a number of ways existing compensation arrangements could be strengthened, including the introduction of a more proactive administration of the requirements for PI insurance.

The paper acknowledged the shrinkage of the PI insurance sector, and had sought comment from the industry about current conditions and competitiveness of the PI insurance market, including access and price.

St John also suggested giving more attention to the financial resources held by a provider, as well as creating a ‘scheme of last resort’ that would provide compensation when a provider was unable to do so.

The Treasury has invited consumers, licensees and insurers to participate in the consultation process, which will close on 1 June, 2011.

The financial planning industry had recently grown anxious about the release of the paper and the recommendations it contains, expressing concerns about possible increases in the costs of running a practice.

St John’s consultation paper was announced as part of the Future of Financial Advice package in April last year.