Compensation scheme of last resort poor policy
Compensation schemes of last resort (CSLR) are poor public policy with high risk that would significantly erode any apparent consumer benefits and should be approached with caution and consultation, according to the Financial Services Council (FSC).
In its submission to the Senate Standing Committees on Economics into consumer protection in the banking, insurance and financial sector, the FSC said examining the regulatory framework, including sufficient capital in licensees, suitable professional indemnity insurance and increased professionalism for the advice industry should be prerequisites for introducing a CSLR.
The FSC cautioned that CSLR “inherently promote moral hazard”, stating that smaller licensees with fewer resources could adopt less risk-adverse strategies and behaviours with the expectation that if something went awry, the scheme would “pick up the tab”.
It also warned CSLR covered a wider range of issues than financial advice failures, including product failures, which would increase on-going liabilities for the scheme.
It also warned CSLR could be retrospective in nature, adding “this raises the prospect of the scheme having to address not only current FOS unpaid determinations but also future determinations relating to events that may date back a number of years”.
“No modelling has been undertaken to determine the size of the liabilities relating to this ‘tail’. There also is an issue as to whether unpaid determinations or judgments of other tribunals and courts would fall within this process,” the FSC said.
With the CSLR last formally considered at a governmental level by Richard St John, the FSC said it engaged University of New South Wales’ Professor Pamela Hanrahan to examine St John’s research.
Hanrahan said the public interest case for a CSLR scheme had not been made, adding consumer interests would be better served through more effective regulation that targeted both institutional and compliance risk in the financial services sector.
“CSLR face challenges in building and maintaining sustainable funding bases-there are potentially difficulties in anticipating and planning for likely claims and thus losses,” the FSC said, quoting Hanrahan.
“If a CSLR is post-funded, levies are likely to increase in circumstances where the financial sector as a whole is under pressure – this may impact disproportionately on smaller organisations.”
AUTHOR
Malavika Santhebennur
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