Australian insurance brokers could be hit with a new fee if Federal Treasury gives the go-ahead to the creation of a statutory compensation fund for retail investors under its proposed Future of Financial Advice (FOFA) reforms.

Peter Boxall, a commissioner at the Australian Securities and Investments Commission, told the Insurance Council of Australia’s (ICA) 2011 Regulatory Update seminar that Richard St John has been appointed to advise Assistant Treasurer Bill Shorten “on the need for, and the costs and benefits of, a statutory compensation fund for retail investors”.

Dr Boxall says the effect of a compensation fund on the requirement for professional indemnity (PI) insurance – the current de facto provider of compensation – is still unclear.

Should PI requirements remain unchanged, a compensation fund would result in an additional layer of costs for broking firms and financial advisers.

Stakeholder discussions have been held on the issue of a compensation fund and a public consultation paper is due to be released ahead of a report back to Mr Shorten by June this year.

Regulatory specialist Mark Radford, of Radford Lawyers, is a member of the industry’s peak consultation group, with which the Government is consulting over the proposals.

He says a key issue of any compensation fund would be the equitability of contributions to the fund among the different classes of financial services licensees, “given the low number of PI claims against insurance brokers”.

Among the other reforms being considered under the FOFA program are changes to the remuneration of financial services licensees, including commissions and volume payments.

But Treasury Corporations and Financial Services Division GM Geoff Miller told a panel session on FOFA at last week’s regulatory update that Treasury has “identified that there is a lack of evidence that commission-based remuneration on insurance has resulted in the same consumer protection issues that we have seen in relation to commissions on investment products”.

Media were barred by ICA from attending the FOFA panel discussion, but Treasury has since made Mr Miller’s prepared comments available.

He says Treasury is concerned about insurance affordability and underinsurance, and will take a view on broker commissions in relation to these issues.

Commissions on insurance products allow the cost of obtaining insurance to be smoothed over the life of the product, he says. “Without commissions, the up-front cost of obtaining insurance would increase.”

A fee-based system would mean customers would have to pay for advice on the most appropriate product and pay again when varying cover or making a claim.

Mr Miller says because insurance is often a grudge purchase and needs to be “sold” by advisers, “banning commissions will reduce the incentive for advisers to sell the product to their clients and may result in greater levels of underinsurance”.

Mr Shorten is expected to announce decisions in relation to volume payments next month, with the FOFA draft bill due to be released in the middle of the year and phased in from July 1 next year.