The Financial Services Council (FSC) has called for amendments to the proposed compensation scheme of last resort (CSLR), saying it is concerned that the current design does not address the source of unpaid determinations in the advice sector.

FSC expressed its fears as a study it commissioned EY to undertake found the future cost of advice failures for the CSLR is likely to be $59.2 million, significantly higher than the $8 million forecast by the Federal Government once black swan events such as a financial crisis are taken into account.

“We reconfirm the longstanding position that the source of unpaid determinations needs to be addressed to reduce the risk to consumers of unpaid determinations and reduce the overall CSLR costs on the financial advice industry and the financial services industry,” FSC said in its submission to Treasury.

“The FSC continues to have concerns that the regulatory gaps, including the lack of oversight and enforcement by ASIC of existing laws, leads to unpaid determinations in the financial advice sector.

“This means that the source of unpaid determinations is not being addressed and the establishment of the CSLR will not change this.”

While the law already requires advice licensees to have adequate financial requirements and arrangements in place for compensating clients, FSC says there are no minimum capital requirements in place.

FSC says the Australian Securities and Investments Commission (ASIC) should also have regard to the professional indemnity (PI) claims experience to inform its view of adequate arrangements as exclusions and declinations mean the CSLR will be forced to prop up a PI framework that is not meeting requirements.

The FSC has made a number of recommendations to strengthen the proposed compensation scheme in its submission. These including ASIC introducing minimum capital requirements for advice licensees and taking proactive oversight of the PI insurance held by them.

FSC says its proposals would lower costs and protect all advice businesses that act with integrity from those that are unable to meet compensation demands and instead push the cost of failure onto the broader industry.

“Weak enforcement has been a significant contributor to the current scale of unpaid determinations and the future cost of the scheme, and a more proactive approach to enforcing the law is essential,” FSC CEO Sally Loane said in a statement.

“Mandating that sound financial services businesses to fund consumer compensation for those businesses which have failed is moral hazard writ large.”

Click here for the FSC submission and here to download the EY report.