Financial service providers (FSPs) that have been subject to an adverse finding by the Financial Ombudsman Service (FOS) since January 2010 have outstanding compensation payments of more than $8.3 million, with clients facing an uphill battle to be paid what they are owed.
Financial services providers (FSPs) whose primary business is financial advice owe wronged clients more than $7.6 million, according to a report published by FOS earlier this month.
A total of 13 determinations against financial advisers, worth an average of $591,000 each, are currently still unpaid, and financial advisers represent 72 per cent of a total of 18 unpaid determinations, FOS says. Most unpaid determinations accrue interest at the rate of about 5 per cent a year from the date of the award.
The size of the unpaid compensation raises the issue of the role played by professional indemnity (PI) insurance as a consumer protection mechanism. The FOS report, Unpaid Determinations by Financial Service Providers, says it is a timely reminder of Australian Securities and Investments Commission (ASIC) Regulatory Guides 126 and 210, “which clearly state that PI insurance is not designed to protect consumers directly and is not a guarantee that compensation will be paid”.
Binding on the FSP
In a statement provided to Professional Planner, FOS says that if an applicant accepts a determination, it is binding on the FSP as a result of the contract between the FSP and FOS. However, FOS adds that it is possible for an applicant to not pay a determination, when the FSP does not have the money to pay.
“There may be a range of reasons for this,” FOS says.
It says that 10 of the FSPs who have not complied with their obligations are in administration or liquidation.
“The remaining eight have advised they don’t have the funds to meet their obligations,” FOS says.
“While FOS does have the option of pursuing legal action, FOS is a not-for-profit organisation and pursuing matters in court is expensive and time-consuming. Most of the non-compliant FSPs are not in a position to pay up even if they were ordered to do so by the courts. In addition, where the FSP has entered administration or liquidation, the law does not allow the legal proceedings to be brought against the FSP, except in exceptional circumstances.”
Reported to ASIC
In its Unpaid Determinations by Financial Service Providers report, FOS says that when an FSP fails to pay a determination, it is obliged to report the non-payment to the Australian Securities and Investments Commission (ASIC).
FOS says it is “in active discussions with ASIC on what can be done to appropriately manage these situations”.
“We note that ASIC has taken regulatory action against, or is currently investigating, many of the FSPs involved,” it says.
“However, it is acknowledged that the outcome of ASIC’s response to these issues is unlikely to provide a solution to the issue of non-payment to consumers.”
FOS says it is “examining what, if anything, we can further do to seek to address these concerns under our Constitution and Terms of Reference”.
“Possible avenues we are exploring include requiring some form of ‘guarantee’ from those firms assessed as potentially at risk, better co-operation with administrators and liquidators and reporting of relevant directors to regulators (ATO and ASIC).”
Additional powers
In its statement to Professional Planner, FOS says it also has the power to:
• Expel the FSP’s membership of FOS (resulting in the FSP being in breach of its statutory obligations as an Australian Financial Systems Licence (AFSL) holder; and
• Commence legal proceedings to enforce the contract.
“One of the options we are exploring is requiring some form of ‘guarantee’ from firms who are assessed as potentially at risk. We will publish a discussion paper in the next few months to encourage industry and public discussion on the issue,” it says.
“This issue of unpaid determinations is restricted a very small minority of FOS member FSPs. To give this some context, we close about 3000 disputes by decision per year and about half of those are in favour of the applicant
Professional indemnity insurance
FOS says professional indemnity insurance (PI) is not designed to be a compensation mechanism but is “a tool for an FSP to reduce the risk of being unable to meet any obligation to pay compensation to a third party”.
“Whilst the current regulations allow PI to be used to meet the requirement for an ‘adequate’ compensation arrangements to be in place, this mechanism is based upon a self-assessment model – meaning that it is for the FSP to declare that the PI is sufficient to meet the ‘adequate’ compensation arrangement requirement,” it says.
“To assist FSPs in making this assessment, ASIC has released Regulatory Guide 126 which sets out ASIC’s view on the minimum features required in a PI policy in order for it to be adequate.
“In our experience, professional indemnity insurance has not proved to be an adequate compensation mechanism for consumers, particularly where firms are insolvent.”
