Time to force product manufacturers to pay for their failures

Financial advisers want product manufacturers to be made responsible for their failures while the Australian Securities and Investments Commission (ASIC) has told a Parliamentary Committee that “sometimes investment vehicles fail and consumers suffer substantial or complete losses”.

A flurry of submissions to a Parliamentary Committee inquiry into the Sterling Income Trust collapse has reinforced the need to expand funding of the Compensation Scheme of Last Resort (CSLR) to better encompass product manufacturers, the continuing inherent inadequacy of the professional indemnity insurance (PII) regime and closer regulatory oversight of Managed Investment Schemes (MISs).

But the bottom line of the majority of the submissions, including that from ASIC, is that the victims of the Sterling collapse have fallen through the regulatory cracks and are highly unlikely to ever be appropriately compensated.

It is against this background that the Financial Planning Association (FPA), the SMSF Association and CPA Australia have all argued that product manufacturers need to be held legislatively accountable within the Corporations Act for failures of the products.

Importantly, all three organisations are urging a review of the PII insurance regime in circumstances where the insurance is difficult to obtain and too often fails short of its objectives.

“The FPA is concerned that highly complex, high-risk products like Sterling Income Trust continue to be marketed directly to consumers through seminars, targeted advertising and general advice,” the FPA submission said. “While the new anti-hawking measures protect consumers from unsolicited sales tactics, there is still a significant consumer protection gap due to the current regulatory settings for general advice.”

CPA Australia was particularly scathing of the existing regime around the CSLR and PII suggesting that “a contributing factor to the need for the CSLR is the failure of Professional Indemnity Insurance (PII) to respond appropriately to disputes, often leading to awarded decisions by AFCA remaining unpaid”.

“Accessibility and affordability of PII for the retail personal advice sector have been challenges for many years, with the impact of the Financial Services Royal Commission resulting in some PII providers exiting the market,” it said.

“The shrinking nature of available cover and associated risk premiums have resulted in many Australian Financial Services (AFS) licensees increasing their excess payable or accepting exclusions in cover to secure PII on an ongoing basis. It is also not uncommon for the approval process for PII to take three to six months.”

“To ensure adequate consumer protection and the viability of a true CSLR, AFS licensees must be able to access affordable cover that is adequate for the nature of the licensee’s business and can adequately meet the potential liability for compensation claims.”

For its part, the SMSF Association said that, “sadly, since the collapse of Trio Capital in 2011, and the various reviews and inquiries conducted, little has changed to improve consumer protections with regards to product providers”.

“The breach reporting regime that applies to financial advisers does not extend to product providers. Product providers are exempt,” the submission said. “In addition, the proposed Compensation Scheme of Last Resort, which is currently tabled in the House of Representatives Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 provides for compensation in relation to personal financial advice and limited financial products only.”

“The exemption of financial product providers from the breach reporting regime creates a gap in the ability for consumers to be fairly and appropriate compensated for inappropriate behaviours and failures of product providers.”