In recent editions of The 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 30 September 2014 (the period for which FOS’s Terms of Reference has been operating).
Since 1 January 2010:
- 25 FSPs have been unwilling or unable to comply with 114 FOS determinations made in favour of consumers.
- The value of the outstanding amounts awarded by these determinations was $10,912,507.73 plus interest (interest accrues at approximately 5% per annum) as at 30 September 2014.
- Four unpaid determinations relate to disputes that are now the subject of legal proceedings commenced by FOS.
This issue affects approximately 165 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, unpaid determinations represent 26.89% of all determinations issued in the Investments, Life Insurance and Superannuation (ILIS) area, and 68% of these relate to disputes in the financial planning and advisory sector. This is despite the small number of FSPs involved.
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.
FOS remains an advocate of some form of limited compensation scheme of last resort as the most effective way to deal with the issue of consumer losses.
In our submission FOS provided some illustrative costing for a funding of such a last resort scheme, showing that such a scheme can be implemented at relatively low cost.
One way to think about the proposal for a last resort compensation scheme is as a risk sharing mechanism to assist PI work more effectively.
A last resort scheme is designed to directly address difficult to assess ex ante low probability, but high impact event of an insured advisor firm failing and going into administration or liquidation.
A PI firm can seek to cover itself against such events by increasing the cost of insurance cover to all advice firms, using broad indicators to segregate firms into different risk buckets for pricing purposes or limit its risk exposure by the type of exclusions on cover that now exist, or some combination of these.
The benefit of a last resort compensation scheme is that it is designed to directly address this risk in a cost-effective way. By doing so it can support the availability of cost effective PI cover for the types of risks PI is better able to assess, price and address relating to financial advice. Similar, tiered risk-sharing style insurance arrangements are common in other risk and insurance areas.
There have been some who claim that it is unfair or inappropriate that the adviser bears responsibility (and the liability for compensation) for their advice to its client, and that this is sometimes seen as ‘excusing’ consumers from taking responsibility for their own poor decision making or product manufacturers from ensuring that their products are “fit for purpose”.
In addition to the Financial System Inquiry, we will be providing 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.