Almost every day in the financial services industry something goes wrong and a consumer is left out of pocket.

Blaming somebody is always an ongoing debate, with fingers pointed towards either the person giving the advice or the product provider. In the end the consumer only wants their money back from somebody.

Resolving the problem can mean a trip to the Financial Ombudsman Services (FOS) and a claim against somebody’s professional indemnity (PI) insurance.

But this has not always led to a satisfactory outcome and the Federal Government is proposing a comprehensive compensation scheme covering the whole financial services industry.

To support such a scheme, a long and comprehensive report was written by Federal Government investigator Richard St John, who looked at how such a scheme could reduce the reliance on PI insurance.

FOS has argued for an industry-funded compensation scheme for a while, and obviously supports the report’s recommendations. It has also found support from lawyers Maurice Blackburn and Slater & Gordon.

In the opposing camp are the Financial Services Council (FSC), National Insurance Brokers Association (NIBA), the Financial Planning Association (FPA) and Australia’s largest dealer group Professional Investment Services (PIS). 

In its submission responding to the report, FOS again argues its support for an industry-funded scheme that would provide limited compensation as a last resort.

“It is intended to be both affordable to licensees and equitable, post-event funded and designed to mitigate moral hazard and provide incentives for improved risk management,” FOS said.

“If enacted it would provide consistency and efficiency of the delivery of compensation and improve the current patchwork of compensation arrangements.

“The proposed scheme will provide certainty for consumers and industry alike.”

Mr St John’s report details some of the problems of relying on PI insurance to deliver adequate compensation to consumers.

“FOS agrees with these findings, but also is of the considered view that ‘improving’ the operation of PI insurance in an open and competitive market is an unrealistic expectation and will never be an effective consumer protection mechanism,” his report said.

The FSC argues current compensation schemes underpinned by PI insurance have worked well and eliminate the need for a “last resort” compensation scheme.

“Such a scheme will increase moral hazard by removing incentives for licensees and consumers to be responsible for their own actions,” the council says in its submission.

“It will introduce cross-subsidisation between licensees and impose an unreasonable cost burden (1% of revenue) on well-capitalised and prudent licensees that already have the means to meet an compensation claims.”

NIBA argues in its submission that it supports investigations into a compensation scheme but then points out that they wouldn’t apply to insurance brokers.

The thrust of NIBA’s argument is the problems that have arisen from financial advisers – which have led to the Future of Financial Advice (FOFA) reforms – haven’t occurred with risk insurance advisers.

“The Government’s announcement that it will treat risk insurance advisers differently in relation to the banning of certain remuneration regarding risk insurance products supports this view,” NIBA says in its submission.

“The current state of the PI insurance market in relation to both industries indicates that the market is soft for insurance brokers but relatively hard for investment advisers. This is a good indicator of the expected risk associated with each industry.”

NIBA opposes an industry-wide “last resort” compensation scheme as it “would punish insurance brokers for the conduct of investment advisers and also adversely affect the trusted adviser status insurance brokers have worked hard to achieve over the years”.

The FPA argues any compensation scheme should be all-inclusive and not just limited to financial advice.

“The proposal for a financial services claim scheme as a potential solution… fails to offer solutions to the underlying issues in the marketplace and supporting laws,” the association says in its submission.

“The proposal prefers an addition to the system that is intended to only apply to financial advice and fails to address the opportunity for application to the entire system of financial services more broadly.

“Such an approach is only likely to exacerbate the problems in the future.”

The FPA argues that problems with advice are not just with the adviser, but extend through the entire value chain from product provider to the individuals who provide the advice.

This view is also supported by PIS, which points out that many compensation problems arise from product providers rather than the person delivering the advice.

“We believe the primary reason for client loss arises out of corporate failure, and the insolvency of product providers, rather than advice-based failures,” the PIS submission says.

“The current review does not propose to deal with loss suffered as a result of investment failure, which has the potential to limit the effectiveness of any proposed compensation arrangements and is not likely to address the issue of client loss. 

“On the basis that any statutory compensation scheme is only proposed to cover loss as a result of licensee misconduct, we do not support a statutory compensation scheme of last resort.” 

Maurice Blackburn still believes there is a role for PI insurance in compensation cases, but argues current compensation schemes are inadequate.

The law firm still wants cases determined by either the courts or FOS, and supports a compensation scheme of last resort to ensure consumers have confidence in the financial services industry.

Slater & Gordon also says PI insurance is there to provide some protection for the consumer, but says the areas not covered should be met by a last resort compensation scheme.

“Compensation under such a fund should be available in circumstances where the licensee has become insolvent and there is no PI insurance in place, the policy in place is not sufficient in size to cover the claim or the claim is rejected because it falls within an exclusion to the policy such as fraud on the part of the adviser,” the law firm says.

And the Federal Government’s view on such a compensation scheme?

It has been remarkably quiet since Mr St John handed down his paper, and hasn’t given any indication either way, saying it is only “reviewing the need for, benefits and costs of a compensation scheme”.

But with the Government facing growing opposition to parts of its FOFA reforms, all the signs are that the compensation scheme idea is, for now at least, on the backburner.