A compensation scheme of last resort for aggrieved consumers is not the answer to improving the financial services sector, according to the Insurance Council of Australia (ICA).

Such a scheme would only mask the problems causing disputes, which mostly involve uncompensated losses from financial advice or managed investment schemes, it says.

“[ICA] strongly submits that there is no justification for a scheme of last resort that would involve cross-subsidisation of compensation costs by industry sectors, such as general insurance, unrelated to the consumer’s financial loss,” it says in a submission to Treasury.

“This is why a targeted approach… tailored to the underlying problem to be solved will be the most effective way of promoting equitable outcomes for consumers and creating consumer confidence in financial services, which plays an integral role in any advanced economy.”

Treasury has issued a supplementary issues paper and terms of reference for its review of external dispute resolution schemes, putting a last-resort compensation scheme back on its agenda.

More than $13 million in Financial Ombudsman Service and Credit and Investments Ombudsman determinations made in favour of complainants had not been paid at May 2.

Treasury says uncompensated losses “indicate a problem that is likely to recur, creating further unpaid determinations in the future”.

Maurice Blackburn Principal Josh Mennen says a last-resort compensation scheme is necessary to protect consumers.

“The industry-funded scheme of last resort will offer a crucial safety net and will go some way to restoring public confidence in the financial services industry, but we need to get it right,” he said.

“Any scheme of last resort needs to be administered by an independent body with appropriate regulatory oversight in place.”