The creation of a financial services compensation scheme in Australia would benefit consumers by addressing gaps in professional indemnity insurance, according to the Financial Ombudsman Service (FOS), which has released a new proposal for the scheme.

“We consider the lack of such a scheme is the missing element in current reform efforts to professionalise the financial advice and planning industries,” FOS says.

Such a scheme would provide fundamental protection for consumers. Supported by the Federal Government, the scheme would work by requiring Australian financial services (AFS) licensees to become members.

Chaired by an independent party, it would also be subject to approval by the Australian Securities and Investments Commission (ASIC) and funded by AFS licensees through regular levies.

The scheme would also partially compensate retail clients where they have an award of compensation in their favour if a financial services licensee becomes insolvent or disappears. This would be up to a level that reflects current limits set for external disputes resolution schemes, with the ability to spread payments over a few years.

“We also propose that an explicit link is created between ASIC’s financial services industry banning powers and successful claims on the scheme, so as to give ASIC stronger powers to address phoenix operations,” the proposals says.

Chief Ombudsman Shane Tregillis says there appears to be broad industry and community acceptance that this clear gap in the consumer protection framework needs to be addressed.

“In our view, it is in the interests of all financial system participants to find a solution to the problem of unpaid compensation, to enhance consumer trust in financial services.”

FOS says it has been a longstanding proponent for a financial services compensation scheme of last resort.