Professional indemnity (PI) insurance is failing to fulfil its role of compensating consumers when financial service providers collapse, the Financial Ombudsman Service (FOS) says.

The PI cover needed to meet regulatory requirements “is either not available or very costly for small firms to obtain”, it has told the Senate inquiry into the Australian Securities and Investments Commission.

“It has also not proved an adequate compensation mechanism for consumers.”

Although financial service licensees are required to have adequate compensation arrangements to meet awards under external dispute resolution, “we consider there is a market failure that needs an appropriate policy response from industry and government”.

FOS supports a financial services compensation scheme of last resort.

It reports a rise in cases of financial services providers being unable to meet either a FOS decision or a court determination because of insolvency.

Uncompensated loss affects the regulatory system’s ability to resolve financial services complaints, and this is particularly important as the population ages and Baby Boomers start to use rather than build savings, the ombudsman says.

FOS notes that submissions to the inquiry raise concerns about the ombudsman’s processes, procedures and outcomes.

It has noted a large rise in the volume and complexity of disputes, driven by the global financial crisis, the 2011 Queensland floods and its expanded jurisdiction under national credit reform.

These have affected its responsiveness. FOS says it continues to work on improving the process.