Despite our best efforts, some consumers do not receive compensation from financial services providers (FSPs) following awards being made in our determinations.
This article provides an update on the number of unpaid determinations for the period 1 January 2010 to 31 March 2015 (the period for which FOS’s Terms of Reference has been operating).
Since 1 January 2010:
- 29 FSPs have been unwilling or unable to comply with 126 FOS determinations made in favour of consumers.
- The value of the outstanding amounts awarded by these determinations was $12,862,911.70 as at 31 March 2015.
- Adjusting for interest and inflation, the present day value of these uncompensated losses is approximately $21.3 million.
- Six unpaid determinations relate to disputes that continue to be the subject of legal proceedings commenced by FOS.
This issue affects at least 179 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 24.47% of all determinations issued in the Investments, Life Insurance and Superannuation (ILIS) area. Of these, 66% relate to disputes in the financial planning and advisory sector.
This is a decrease of approximately 6% on the figures as at 31 December 2014, but as the December quarter shows, the figures remain volatile and subject to large spikes caused by the failure of event a single FSP.
Possible actions to address uncompensated losses
The FOS submission to the Final Report of the Financial System Inquiry provides more information on this issue.
FOS’s key recommendation was that a limited compensation scheme of last resort be established to address the issue of unpaid FOS awards of compensation to consumers. This issue was raised in the Interim FSI Report but not addressed in the Final FSI Report. This remains a key missing element in the current reform proposals to improve trust and confidence in the financial planning and advice sector.
Disputes involving FSPs that experience an insolvency event during the course of EDR are often discontinued on the basis that the insolvency process is a more appropriate forum. As there is no decision on the merits made by FOS, the full impact and extent of unpaid compensation for these types of matters is unknown. We do however, expect that the issue is far more significant than what we are able to quantify.
In addition, the submission also provided 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 also discussed this in more detail in the August 2014 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.