A Senate committee’s report on consumer protection in financial services has questioned the effectiveness of external dispute resolution (EDR) schemes.

The Economics References Committee inquiry into the regulatory framework for protection of consumers in the banking, insurance and financial services sector published its report last week, also recommending an extension of the Hayne royal commission.

The committee says EDR schemes such as the Financial Ombudsman Service were plagued with problems and it is yet to be convinced that the new Australian Financial Complaints Authority will be different.

“The effectiveness of this new body … remains to be seen. The committee reserves its opinion, but notes that multiple previous inquiries, as well as much of the evidence in this inquiry, outlined significant concerns regarding the prior EDR schemes.

“It is hoped that the new scheme has taken steps to prevent similar concerns arising.”

The committee says less pressure would fall on EDR schemes if the financial services industry behaved better.

“EDR schemes should not work as a band-aid to patch up a leaky, broken system, but rather work effectively with regulation and penalties to ensure financial entities are behaving ethically and according to the requirements of the law, and are incentivised to do so.”

The committee declines to make specific policy recommendations, because it expects most areas of concern to be tackled by the royal commission.

However, it says there are “significant problems” in the system and more time is required to examine them.

“Major systemic and structural issues remain in the system as a whole, and these continue to negatively impact consumers.”

It quotes the Financial Rights Legal Centre’s assertion the insurance sector is “at least 20 years behind” banking in addressing basic consumer issues, from claims handling to unfair contract terms and disclosure problems.

The inquiry also flags an issue with financial services organisations lacking sufficient professional indemnity insurance.

The report says the royal commission has taken a “comprehensive and forensic” approach, but many areas have not been addressed. “Given the extent of misconduct identified in the royal commission’s work to date, the committee considers that the royal commission should be granted an extension of time.”

It also calls for increased funding for community legal and financial counselling services aiding victims of financial misconduct. These services are already working at capacity, the report says.