The proposed compensation scheme of last resort should be designed to include financial services that are not solely provided by prudentially regulated firms, the Insurance Council of Australia (ICA) says.

In a submission to Treasury ICA has urged it to reject a “broad coverage” approach and go for a “mid-coverage” system – the other option that Canberra is considering for the scheme that it wants ready by December.

The scheme will be overseen by the Australian Financial Complaints Authority (AFCA), and the Treasury discussion paper says a “broad coverage” approach means all activities that require a financial services firm to hold AFCA membership would be included.

But ICA says it is concerned about “less riskier parts of the financial services sector, such as general insurers, cross-subsidising the riskier elements such as those providing financial advice”.

Treasury says a “broad coverage” arrangement would bring greater protection and clarity for consumers, and a wider membership base would mean that large and unexpected claims costs could be met by a bigger pool of members.

But ICA says the “mid-coverage” approach “is a more targeted means of resolving the identified problem of unpaid compensation in the provision of particular services”.

“As noted in the discussion paper, the ‘mid-coverage’ approach also acknowledges that services provided by prudentially regulated entities are at a low risk of leaving a consumer or small business with unpaid determinations.

“In particular, there is no evidence of unpaid compensation in respect of a prudentially regulated general insurer.”

The council also opposes using a funding approach based on a firm’s ability to pay, preferring instead that a risk-based approach be adopted to fund claims costs, with risks assessed at the financial service class level.

“Any financial service class levels should group firms that provide a similar service, and we support collection of data in defining the risk factors,” ICA says.

The council says it still has “serious reservations” about the industry-funded compensation scheme.