The Insurance Council of Australia (ICA) supports a recommendation against establishing a last-resort compensation scheme for financial services consumers.

In a submission responding to a report by lawyer Richard St John on compensation arrangements for consumers of financial services, ICA says that it supports his conclusion that such a scheme would be “inappropriate and possibly counterproductive”.

Mr St John was appointed by the Federal Government last year to compile a report on compensation arrangements as part of the Future of Financial Advice reforms.

Noting that overall it is “supportive” of the report’s recommendations, ICA says “further rigour should be introduced into the current regulatory regime to ensure Australian financial services licensees are held responsible for holding current and adequate professional indemnity (PI) insurance cover”.

The council says it strongly supports the recommendation that licensees should provide the Australian Securities and Investments Commission (ASIC) with additional assurance that their PI insurance cover is current and is adequate to their business needs.

Should a licensee’s PI cover status change, the onus should be on the licensee and not the insurer to notify ASIC.

ICA says it would be “cost-prohibitive” for insurers to put systems in place to undertake notification to ASIC, and if required to do so some insurers “may cease to provide such cover at all”.

But the council “strongly opposes” the recommendation changing the circumstances under which consumers can claim compensation awarded from the licensee’s PI policy should they not be able to recover compensation directly from a licensee.

“Under the proposed change, a third-party claimant could potentially recover from an insurer where the insurer has had no opportunity to defend the proceedings,” it says.

This could occur if an insured licensee fails to notify its insurer about legal proceedings brought against it by a claimant.

“A fundamental assumption underlying any liability insurance is that there exists the opportunity for a substantive defence of any claim.”  

Financial Services Minister Bill Shorten says the Government will consider industry responses to the report, as well as the result of the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into the Trio Capital collapse.

The Government is expected to finalise its response by the end of August.