The sharp rise in financial services complaints highlighted by the Financial Ombudsman Service’s (FOS) 2008/09 review serves to underline the impending crunch in professional indemnity (PI) insurance capacity.

As Chief Ombudsman Colin Neave notes in the report, disputes are unlikely to drop off any time soon – so profound has been the damage attributed to the global financial crisis.

The 68% jump in investment-related disputes to 1540 in one year is nothing short of staggering.

And yet FOS dispute compensation caps are set to rise in 2012 – by 50% to $150,000 for insurance brokers and up 87% to $280,000 for financial planners.

Concerns about the hard PI market and the dwindling affordability of cover are well documented.

Reports over the past year have included rate rises of up to 100% for some small financial planning businesses.

It should be noted that insurance brokers, while accounting for a tiny 1% of general/domestic insurance disputes, are nonetheless affected by rising PI rates.

Financial planners have told the Federal Parliamentary Joint Committee on Corporations and Financial Services inquiry into financial products and services in Australia it’s a potential survival issue, particularly for individual licensees and small firms.

In its submission to the inquiry, the Financial Planning Association of Australia (FPA) rightly points out that PI insurance now underpins consumer compensation mechanisms in this country.

New attention to licensing anticipated to come out of the inquiry may mitigate disputes in the managed investments area, where the number of disputes was up 96% to 853.

Investment, Life Insurance & Superannuation Ombudsman Alison Maynard says FOS is typically seeing problems with inappropriate advice and the standard of service with managed investment disputes.

The UK’s Financial Services Compensation Scheme fund is not without its critics, but it does provide an alternative to a reliance on PI insurance.

As the Insurance Council of Australia (ICA) explained in its submission to the federal parliamentary joint committee, professional indemnity cover is a commercial product designed to protect the financial wellbeing of insured financial advisers or Australian financial services (AFS) licensees.

“It is not designed to enable compensation to be paid to third parties, although in many cases the money received under the policy is on-paid to third parties, enabling a wronged client to be compensated by the financial adviser or AFS licensee,” it says.

Indeed, if the Government policy goal is to allow consumers to receive the compensation they are awarded in all cases, then a compensation fund seems worth considering.

How such a fund would operate would no doubt be fodder for further inquiries. The British situation, where all the participating industries pay into a central fund, is far from ideal.

As UK Institute Insurance Brokers CEO Barbara Bradshaw pointed out last week, there’s a lack of balance in a scheme that requires brokers to help pay compensation for unrelated financial institutions like banking.

And yet the limited availability of PI cover for financial services is clearly unsustainable. It needs to be addressed by the Federal Government and its appointed regulators in some way, sooner rather than later.