The future role of compulsory professional indemnity (PI) insurance for financial advisers had been brought into question by the Government’s announcement that it will pursue a Compensation Scheme of Last Resort this year.
The Treasurer, Josh Frydenberg released a discussion paper on the establishment of the compensation scheme just before Christmas with the discussion paper drawing heavily on the recommendations of the Ramsay Review which recommended that such a scheme should be funded by financial services firms via levy.
The discussion paper pointed to the fact that the Ramsay Review had pointed to financial advice as being the largest contributor to unpaid determinations on the part of the former Financial Ombudsman Service (FOS) and said that the recent data provided by the Australian Financial Complaints Authority (AFCA) had confirmed this proposition.
A key issue raised in the discussion paper is whether the compensation scheme should cover more than just personal or general advice and has nominated the United Kingdom’s Financial Services Compensation Scheme which covers a wider range of issues from bank deposits to mortgages.
The discussion paper has recognised the significant cost likely to be imposed on firms in terms of funding the compensation scheme and has questioned to what extent the funding model should be based on a firm’s ability to pay and how that ability should be assessed.
The release of the discussion paper comes on the back of recent confirmation that PI insurance is becoming increasingly expensive and difficult to obtain by financial planning firms, with fewer insurance firms willing to underwrite risks in the sector.
PI is a compulsory requirement for financial planning firms and compulsory funding of a compensation scheme of last resort opens for question the cross-over of jurisdictions.