The Federal Treasury appears to have left open the question of a statutory compensation scheme covering financial planners, with a review due for completion in January still yet to be released.
The review is being undertaken by lawyer Richard St John, and has been commissioned by the Government as part of the Future of Financial Advice reforms. The review is examining the need for, and costs of, a statutory compensation scheme for financial services that would complement the limited role professional indemnity (PI) insurance plays in retail investor compensation.
Such a scheme would see all Australian Financial Services Licensees levied by a certain amount, so that when investors have suffered significant losses as a result of negligent advice the pooled money is used to compensate them.
A statutory ‘last resort’ compensation scheme could be a useful addition to the marketplace, according to Financial Planning Association deputy chief Deen Sanders.
However, Sanders warned that if the compensation system wasn’t completely reviewed, a compensation scheme “might exacerbate some of the failures of proportionate liability, which [had] been missing from the discussion to date”.
“If a product fails or a research [provider] fails its obligations, often the only one who pays compensation is the advice firm, which is unfair,” Sanders said. “It’s a failure of proportionate liability, which is something we’d like to see improved in the wider review,” he added.
Even after the possible introduction of the scheme, advisers would still be required by law to have PI insurance, which remains the most expensive part of owning a financial services licence, according to Alexis Risk and Compliance principal Christina Kalantzis.
Kalantzis said the only concern about the introduction of a statutory compensation scheme was the potential additional costs for licensees.
She warned that PI insurance was an already shrinking sector, and that new licensees coming onto the market had to pay a minimum of $7,000-$10,000 in premiums.
“My concerns are that there are already high barriers to entry from a cost perspective and from a compliance burden as well, and I don’t want to see a report that increases those two things,” Kalantzis said.
“If that happens, then we will be seeing the boutiques and the independents coming out of the market, which means we would get decreased competition,” she said.
The Association of Financial Advisers chief, Richard Klipin, said the industry would have to wait until all the details were revealed before the issue could be further discussed. He added that ensuring robust market competition and appropriate consumer protection were the most important parts to come out of the report.
The Treasury released a statement to Money Management noting that the review process was still at an “information gathering stage and had not yet reached a conclusion on whether change is required to the current compensation arrangements”.
The statement also assured the financial services industry that the consultation paper would come out in the near future.
