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 30 June 2015 (the period for which FOS’s Terms of Reference has been operating).
Since 1 January 2010:
- 33 FSPs have been unwilling or unable to comply with 133 FOS determinations made in favour of consumers.
- The value of the outstanding amounts awarded by these determinations was $12,604,735.82 plus interest as at 30 June 2015.
- Inclusive of the interest awarded by the decision-maker and adjusted for inflation over time, the real value of this uncompensated loss is $16,585,586.00.
- The unpaid determinations situation was recently aided by a previously non-compliant FSP entering into a payment plan arrangement with the affected consumers to satisfy a $500,000 outstanding debt.
This issue affects approximately 188 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 24.36% of all determinations issued in the Investments, Life Insurance and Superannuation (ILIS) area, and 58% 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 final 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?
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 updated submission FOS provided some further 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.
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.
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.