The Financial Services Council (FSC) has echoed the sentiment of an independent report calling for a “sense of proportion” in the debate over compensation arrangements for consumers of financial services.
The Parliamentary Joint Committee (PJC) into Corporations and Financial Services is expected to release its report into the collapse of Trio Capital later today (Wednesday, May 16).
The report is expected to canvass a range of matters, which were the subject of detailed consideration in the St John Report, an independent review into compensation arrangement for consumers of financial services commissioned by the Australian Government.
Martin Codina, director of policy at the FSC, says the regulator supports the report and its conclusion that a last-resort statutory-compensation scheme would be “inappropriate and counterproductive”.
The St John Report found that a compensation scheme would not work to improve conduct in the industry or the quality of advice.
“The FSC commends the findings of this independent report, which recognises that the existing Australian regulatory framework is well developed and already provides multiple layers of consumer protection,” says Codina.
The report noted that this regime is being further strengthened through a series of ASIC, APRA and government measures, including the introduction of the Future of Financial Advice (FoFA) and Stronger Super reform packages.
Codina acknowledged the cautious approach adopted by the Minister for Financial Services and Superannuation, Bill Shorten, when responding to the report.
“The Minister should be congratulated. This is a complex issue which if poorly managed has the potential to create a wide range of unintended consequences – adding to risk in the financial system rather than reducing it.”
It’s not an ambulance job
Last week the government released the report into compensation arrangement for consumers of financial services prepared by Richard St John following consultation with industry, consumer representatives and other interested parties.
The report was commissioned in response to the 2009 Parliamentary Joint Committee on Corporations and Financial Services report an inquiry into financial products and services in Australia.
St John was tasked with examining the existing compensation arrangements available to consumers of financial services and assesses the need for the introduction of a statutory-compensation scheme.
His report acknowledges that regardless of how stringent the regulations surrounding the provision of financial advice are, there are times when things do go wrong, and appropriate avenues for compensation need to be available for retail consumers.
“This government takes consumer protection very seriously and has established FoFA as a key plank in our efforts to better protect consumers,” said Minister Shorten in a statement.
“As Mr St John’s report has shown, there is no silver bullet to solve this complex problem overnight.
“I would like to thank Richard for his detailed and holistic report, as well as all the organisations and individuals who participated in the review process.
“The release of this report is an important step in ensuring that Australians have access to the most effective compensation arrangements.
“Getting these arrangements right is essential – one only need to consider the recent corporate collapses like Trio, Westpoint and Storm to appreciate this.”
The report found that “retail clients are generally able to recover compensation for losses attributable to misconduct by licensees’ except where the licensee lacks the resources to meet those claims”.
It further concluded that it would be inappropriate at this point in time to introduce a ‘last-resort’ compensation scheme without first strengthening the existing compensation arrangements.
Recommendations include strengthening the existing compensation arrangements, in particular the holding of adequate professional indemnity-insurance cover, greater ASIC monitoring and capital-adequacy requirements to ensure that licensees have the financial resources to meet compensation liabilities.
Finally, it suggested that consideration be given to the merits of product issuers being required to take greater responsibility for protecting consumers of their products.
St John found that if the current arrangements were reinforced, “it would be open to round them out in due course with a more comprehensive scheme of last resort”, but recommends that “it would be inappropriate and possibly counterproductive to introduce a last-resort-compensation scheme at this stage”.
The government will take into consideration any recommendations resulting from the PJC inquiry into the collapse of Trio Capital before responding to St John’s report.
It anticipates finalising its formal response to the report in the next three months.
Submissions are due by July 6. The full report is available here.
