The issue that some consumers have not received compensation from financial services providers following FOS Determinations is a serious one.
This is now emerging as a structural issue in our investments jurisdiction. While it only involves a small minority of our members providing financial advice, the level of unpaid Determinations is currently 33% of all Determinations made in our investments jurisdiction. Read our report.
Under the External Dispute Resolution Scheme guidelines, when Determinations are made in favour of the consumer, compensation is to be paid by the scheme member.
- 18 financial services providers haven’t complied with Determinations made by FOS in favour of consumers (1 January 2010 to 1 January 2014).
- One of the firms is currently in administration and a further nine are in liquidation. The remaining eight have advised they have insufficient funds to meet their obligations.
- $8,335479.95 plus interest is owed to 99 applicants whose claims FOS upheld but have not been paid compensation. Interest accrues at approximately 5 per cent per annum from the date of the award in most cases.
- Of the unpaid Determinations, all except one were in the investment area involving financial advisers. This represents a very small number (17) of FOS’s 4,900 financial licensee members.
- In the investments, life insurance and superannuation area, the level of unpaid Determinations is 33 per cent of all Determinations made.
- Under FOS’s Terms of Reference and ASIC’s Regulatory Guide 139, FOS must report financial services providers’ non-compliance with Determinations to ASIC. We are also examining if there are any further steps we can take under our Constitution and Terms of Reference to address consumer concern.
- ASIC is charged with the regulatory powers to investigate financial services providers that are in breach of FOS’s Determinations. FOS remains in active discussions with ASIC regarding unpaid Determinations to consumers. We understand that ASIC has taken regulatory action against, or is currently investigating, many of the financial services providers who have not paid Determinations.
Professional indemnity insurance limitations
Our experience is that professional indemnity insurance isn’t an adequate compensation mechanism for consumers where companies have gone into administration or are insolvent.
Under the Corporations Act, ASIC licensees are required to have adequate compensation arrangements, including covering external dispute resolution scheme compensation pay-outs. To date, professional indemnity insurance policies have been that mechanism.
Some of the reasons why professional indemnity insurance hasn’t been adequate include:
- aggregate funds available under the policy were insufficient to meet all awards
- conduct which gave rise to the compensation awarded was not covered by the policy
- the amount of the award was below that of the applicable excess under the policy.
There have been varying opinions on the most appropriate compensation models. We remain an advocate for a limited last resort compensation scheme for consumers. Under schemes of last resort there is a pool of money available to make sure consumers are compensated when all other avenues of redress have been exhausted.
FOS will continue to discuss appropriate mechanisms with ASIC, industry, consumers and policy makers to ensure that when decisions of compensation are made in favour of consumers, these are able to be paid. We propose releasing a discussion paper by mid-year examining the options available to address this problem.