An industry-funded compensation scheme of last resort is not the answer to improving the dispute resolution framework, according to the Insurance Council of Australia (ICA).

Such a scheme could facilitate cross-subsidisation of compensation costs by groups unrelated to the consumer’s financial loss, it says.

“A key concern for ICA in considering the question of a last-resort compensation scheme is the moral hazard that would result from removing all risk from financial decision-making,” ICA says in a submission to a review of the framework.

“In the first instance, priority should be given to bolstering the regulatory framework for financial advisers and other licensees.

“Then, if deemed necessary, detailed consideration of the design of a last-resort compensation scheme will be needed to address the legitimate concerns of moral hazard and inequity that a compulsory industry-funded scheme raises.”

The panel reviewing the external dispute resolution and complaints framework sees “considerable merit” in an industry-funded compensation scheme of last resort.

It says when consumers are denied access to justice due to a lack of resources by the financial business, “this has a negative impact on both the individual consumer and the broader financial system”.

“In circumstances where the market is unable to provide a solution to this problem, the panel is of the view that there is considerable merit in introducing an industry-funded compensation scheme of last resort.”

The panel will give its final report to the Government by March 31.