FPA reinforces need to expand compensation scheme

The Government’s approach to the compensation scheme of last resort will leave consumers unprotected and financial planners footing the bill, according to the Financial Planning Association (FPA).

What is more, the FPA is claiming that without change the costs of the scheme will fall to advisers while serious misconduct, misrepresentation or fraud by product issuers or manufacturers will be ignored.

In a submission to the Senate Economics Legislation Committee, the FPA has detailed the shortcomings of the Government’s legislation setting up the compensation scheme stating that it is too narrow in scope, provides inadequate coverage to consumers and does not address the underlying causes of unpaid determinations.

However, the FPA claims that, with certain amendments, the Government’s scheme can meet its intended purpose and specifically recommends that it be expanded to include all financial services providers that are within the jurisdiction of the Australian Financial Complaints Authority (AFCA).

“This change will provide protection to everyday Australians from uncompensated losses and ensure sustainable funding for the scheme,” it said.

“When assessing claims, we acknowledge that AFCA seeks to appropriately apportion claims between inappropriate advice and product. However, the proposed scheme places a spotlight on advisers for the allocation of fault. In contrast, serious misconduct, misrepresentation or fraud of a product issuer or manufacturer, is ignored given their specific exclusion from the proposed scheme.”

“The current Bills would exclude significant segments of the financial industry, such as managed investment schemes (MIS) which will leave many consumers affected by financial misconduct without adequate protection or avenue for compensation. In essence, the proposed scheme will only apply to five financial products and services:

• personal advice on relevant financial products to retail clients,
• credit intermediation,
• securities dealing,
• credit provision, and
• insurance product distribution.

“As such, it will mean that a large number of financial institutions and product providers will not be required to contribute to the costs of compensation,” the submission said.

“Paying compensation must primarily be the responsibility of the party whose behaviour gave rise to the complaint. Holding financial services firms and practitioners responsible for their own behaviour is an essential component of professionalisation and necessary to improve standards.”