Time to FICS investor protection

Westpoint is a classic example of the need for drastic changes in financial planning consumer protection, according to the Australian Consumers’ Association (Choice).

The failed property group left countless casual­ties in its wake, not least the 4300 investors who had collectively invested around $400 million, in many instances on the back of ill advice from their financial planners.

To add insult to injury, some of the investors crushed in the collapse were excluded from the Fi­nancial Industry Complaints Service (FICS), which caps financial compensation at $150,000.

While the Australian Securities and Invest­ments Commission (ASIC) has stepped in to help, launching legal action on behalf of investors in the failed enterprise, Westpoint’s demise serves to illustrate that in many cases, simple redress is not always available to consumers.

“Often when we have these significant financial events, consumers are left trying to pick up the pieces without a simple solution,” says Elissa Free­man, senior policy officer at Choice.

“Comparative schemes have a limit of $280,000. The lower limit for FICS means not enough retail complaints are covered and as a result, too many consumers are forced into the legal sys­tem to get a resolution of their complaints.”

The Westpoint Group collapsed in early 2006 after proceedings commenced by ASIC in Novem­ber 2005 regarding two companies in the group.

The companies had engaged in high-risk invest­ment strategies and were ultimately unsuccessful in a bid to raise funds for a handful of property developments.

ASIC has since undertaken 62 investigations and commenced 29 proceedings to preserve assets and wind up companies to stop misconduct.

However, Freeman, says FICS should raise its monetary limit on complaints to $280,000 in line with both the Banking and Financial Services Ombudsman and the Insurance Ombudsman Service to make it a “more effective” external dispute resolution (EDR) scheme.

Choice’s push to improve compensation for consumers who lose money on the back of poor advice from their planners does not stop at FICS.

Freeman believes professional indemnity insur­ance, which covers the losses faced by a consumer as a result of dishonesty or incompetence on the part of their financial planner, also falls short of the mark.

In late November ASIC released a new regula­tory guide detailing compensation and insurance arrangements for financial planners and other AustralianFinancial Services (AFS) licensees.

Choice has called on policy makers to go one step further and introduce a government-funded lifeboat which would act as a “compensation fund of last resort”.

“This is an area that has taken a step forward but there are still some gaps in the professional indemnity insurance framework,” says Freeman.

“Consumers remain exposed to poor practices from rogue financial planners and that’s why we’ve been arguing for a separate compensation fund which would provide compensation of last resort for customers.”

The fund would come into play where an adviser becomes insolvent and no insurance cover is available, leaving the consumer to foot the bill.

Compensation aside, Freeman believes the on­going debate over conflicts and disclosure provides the biggest challenge for the industry in the next five years.

The financial planning world remains divided over whether improved disclosure sufficiently deals with the conflicts of interest inherent in the commission-based advisory model.

Many factions of the industry believe financial planners have a competing professional interest with regards to the commissions they receive for product recommendations, while others argue these conflicts are entirely manageable.

However the increasing complexity around trail commissions makes it difficult for consumers to determine the impact of such a model on the qual­ity of information they are receiving.

“It’s difficult for financial planners to fulfil their duties without bias where there are competing interests,” says Freeman.

“Some members of the industry are very aware of this and are moving away from the commission-based model to a fee-for-service model which removes some of these conflicts, but there is another part of the industry that persists with this disclosure regime around conflicts. Our response to that is that consumers aren’t in a position to be able to assess the difference in commissions, so it doesn’t remove the conflict, it obfuscates the conflict.”

Choice supports a move towards fee-for-service advice, although Freeman admits this may still be some way off.