The National Insurance Brokers Association (NIBA) says it has “several concerns” with the proposed compensation scheme of last resort, including the failure to address the issue of “moral hazard”.

NIBA says the design of the scheme, as outlined in consultation papers from Treasury, provides an incentive for dishonest firms to use the program to underwrite poor governance practices or unethical conduct.

And this means dishonest firms can continue “safe in the knowledge that the scheme will ‘pick up the tab’,” NIBA said on its website.

The peak body has raised its concerns in a submission to the Treasury consultation, which closed last week.

NIBA declined to release its full submission to insuranceNEWS.com.au.

NIBA says its submission also questions why the scheme was expanded to include services that were not within the scope of the original recommendation made by the Ramsay Review, which looked into the merits and potential design of a compensation program.

The Ramsay Review presented its findings to government in September 2017 and the Hayne royal commission in its 2019 final report backed the setup of a compensation scheme.

NIBA says the expansion has been proposed despite a lack of evidence to suggest that a significant problem on unpaid compensation exists within the areas of concern outlined in its submission.

The broking peak body says it also questioned why other areas of the Ramsay Review were ignored in the design of scheme, particularly in relation to greater regulatory oversight and data collection by the Australian Securities and Investments Commission (ASIC) regarding professional indemnity insurance.

“NIBA argued that effective regulatory oversight combined with the new intervention powers granted to ASIC would significantly decrease demand for a [compensation scheme of last resort],” NIBA said.

Peak bodies for advisers and financial planners have also flagged concerns over the proposed compensation scheme.

The Association of Financial Advisers, the Financial Planning Association and other peak bodies released a joint statement saying the design of the scheme “may be [the] last straw” for struggling advisers and planners.

“The associations are concerned the scheme may not be used purely as a last resort,” the joint statement said. “This is a major and unwarranted departure from the [Hayne] royal commission’s intent.”

Consumer advocate Choice says the government has failed to deliver on its public commitments to victims of financial scandals.

“The government committed to a scheme that could pay over $540,000 in compensation, as recommended by the royal commission, covering a broad range of financial scandals,” CEO Alan Kirkland said.

“The proposals now released by the government will disappoint victims by capping compensation at $150,000 and failing to cover compensation from financial scandals in areas like managed investment schemes and funeral insurance.

“This will see many people go uncompensated.”

Choice and other consumer advocates in their joint submission to Treasury made several recommendations such as expanding the scope of the scheme to include unpaid compensation awards from court and tribunal decisions.

They also pushed for an expansion of the scheme to include voluntary Australian Financial Complaints Authority (AFCA) members.

The Treasury proposal paper says the scheme will consider claims for unpaid AFCA determinations (that is, where a complaint was made to AFCA from November 1 2018) and the determination is in relation to a financial product or service within the scheme’s scope.