In recent editions of The FOS Circular and submissions to public inquiries we have discussed the issue of some consumers not receiving compensation from financial services providers (FSPs) following FOS determinations. This article provides an update on the number of unpaid FOS determinations for the period 1 January 2010 to 31 December 2014 (the period for which FOS’s Terms of Reference has been operating).
Since 1 January 2010:
- 26 FSPs have been unwilling or unable to comply with 120 FOS determinations made in favour of consumers
- the value of the outstanding amounts awarded by these determinations was $12,686,956.69 plus interest (interest accrues at approximately 5% per annum) as at 31 December 2014
- adjusting for interest and inflation, the present day value of these uncompensated losses is approaching $15,000,000
- four unpaid determinations relate to disputes that continue to be the subject of legal proceedings commenced by FOS.
This issue affects approximately 174 individuals whose claims FOS upheld, but who have not been paid the compensation awarded to them.
Only a very small percentage of all FOS members are involved, and these figures represent only a small proportion of all the awards we issue across all our jurisdictions in banking, insurance, life insurance and investments.
However, despite the small number of FSPs involved, unpaid determinations represent 30.03% of all determinations issued in the Investments, Life Insurance and Superannuation (ILIS) area. Of these, 69% relate to disputes in the financial planning and advisory sector.
This is an increase of almost 4% on the figures for the September quarter, and was caused by the liquidation of a single financial advisory firm being unable to meet its obligations in respect of six determinations totalling almost $1.8million.
Possible actions to address uncompensated losses
The FOS submission to the interim report of the Financial System Inquiry provides more information on this issue in response to the report’s canvassing of the concerns expressed by FOS and others that current compensation arrangements are not adequate to provide redress to consumers who have suffered financial loss.
In addition, the submission also provides information on the problems of relying on professional indemnity insurance as a compensation mechanism, and offers further information in response to the question: Given the limitations of professional indemnity (PI) insurance, what options, if any, exist for addressing the issue of consumer loss?
PI Insurance is just not effective. Awards of compensation are not paid to consumers. The FSI interim report identified a clear gap in this area of consumer loss and sought views on how to address this.
Given that the problem of uncompensated loss continues to arise for consumers, FOS remains an advocate of some form of limited compensation scheme of last resort, which can be implemented at relatively low cost, as the most effective way to deal with the issue of consumer losses.
We discussed this in more detail in the last edition of The FOS Circular.
In addition to the Financial System Inquiry, we provided a submission to the Senate Economics References Committee inquiry: Scrutiny of Financial Advice, particularly in response to the question: whether existing mechanisms are appropriate in any compensation process relating to unethical or misleading financial advice and instances where these mechanisms may have failed.
We will continue to explore more appropriate mechanisms for a limited last resort compensation scheme for consumers with ASIC, industry, consumers and policy-makers to ensure that when decisions of compensation in favour of consumers are made, these are able to be paid. We look forward to working with the industry to develop a workable scheme.
You can read more details on unpaid determinations here.