The Insurance Council of Australia (ICA) has called for the design of the proposed compensation scheme of last resort to include financial services that are not solely provided by prudentially regulated firms.

In a submission to Treasury the council has urged it to reject a “broad coverage” approach and go for a “mid-coverage” system – the other option that Canberra is considering for the scheme that it wants ready by December.

ICA says it is concerned about “less risky parts of the financial services sector, such as general insurers, cross-subsidising the riskier elements such as those providing financial advice”.

The “mid-coverage” approach “offers a more targeted means of resolving the identified problem of unpaid compensation in the provision of particular services”.

Treasury says “broad coverage” means all activities that require a financial services firm to be members of the Australian Financial Complaints Authority (AFCA) would be included.

This would bring greater protection and clarity for consumers, and a wider membership base would mean that large and unexpected claims costs could be met by a bigger pool of members.

But ICA says the ‘mid-coverage’ approach acknowledges that services provided by prudentially regulated entities are at a low risk of leaving a consumer or small business with unpaid determinations.

“There is no evidence of unpaid compensation in respect of a prudentially regulated general insurer.”

ICA says it also opposes using a funding approach based on a firm’s ability to pay, preferring instead that a risk-based approach be adopted to fund claims costs, with risks assessed at the financial service class level.

“Any financial service class levels should group firms that provide a similar service, and we support collection of data in defining the risk factors,” it says.

The council says it still has “serious reservations” about the industry-funded compensation scheme that would be overseen by AFCA.