Professional indemnity insurance is limited as a compensation mechanism for poor financial advice, the Financial Ombudsman Service (FOS) says.

In its submission to the Financial System Inquiry, FOS continues to call for a limited last-resort compensation scheme for consumers, saying this is “a key missing element” in proposals to improve trust in financial planning. 

Unpaid compensation featured in the inquiry’s interim report, but is left out of the final report.

FOS calls on the Government to implement a scheme if industry participants do not work together to establish one.

Financial advisers have used professional indemnity cover to pay compensation ordered by FOS determinations, but FOS says while the insurance is important “it is not designed to function as a consumer compensation mechanism”.

The insurance may not be enough, the amount awarded may be below the policy excess or the insurance may not cover the conduct that led to the complaint.

Between January 2010 and last December, 26 providers were unwilling or unable to comply with 120 determinations, with $12.69 million outstanding at December 31.

The cost of a last-resort scheme would be relatively low if spread across financial advisers and managed investment schemes, and could be funded by a levy, FOS says.