Financial advisers’ professional indemnity (PI) insurance has proved inadequate when companies enter administration or become insolvent, according to the Financial Ombudsman Service (FOS).

The Australian Securities and Investments Commission has told the financial system inquiry that growing levels of uncompensated loss “threaten to erode trust and confidence in the financial service sector and the effectiveness of the dispute resolution system”.

It says a last-resort compensation scheme for consumers may be a remedy and would create a more level playing field between different financial advice business models.

FOS continues to argue for such a scheme – which creates a compensation pool – and is preparing a discussion paper on the options available, for issue mid-year.

More than $8.35 million is owed to 99 applicants whose claims FOS has upheld, but who have not been paid.

Of the 18 financial services companies that owe money, 17 are advisers. One is in administration, nine are in liquidation and eight say they lack the funds to pay.

Advisers are required to have adequate compensation cover as a condition of licensing, but FOS says PI insurance is often insufficient, or award amounts are less than policy excesses.

It says a policy may not respond because an adviser’s conduct led to the claim.