Financial services legal expert Richard St John has released a report on issues surrounding compensation for investors in financial services products.

 

The report, Review of compensation arrangements for consumers of financial services, was commissioned in April 2010 by the then Minister for Financial Services, Chris Bowen, to review the costs, benefits and need for a  statutory compensation scheme.

The review forms part of the broader Future of Financial Advice (FoFA) reforms. The discussion paper provides an overview of the financial services industry, the regulatory environment in which it operates and the current compensation arrangements required of licensees and how they work in practice.

 

It finds that of almost 5000 entities licensed to offer financial services, more than 4,500 are licensed to provide advice and of those, 3,300 are authorised to provide personal advice.           

 

More than 4,600 licensees are authorised to deal in a financial product, with almost 60 per cent of those licensees authorised to issue a financial product, including deposits, insurance, managed investment schemes, securities, superannuation products or margin lending.

 

Almost 93 per cent of licensees are licensed to undertake more than one financial services activity. Of these, more than 70 per cent are authorised both to provide financial product advice and to deal in a financial product.

 

The review is concerned with those licensees who provide financial services to retail clients. Around three quarters of licensees, that is just under 3,700, are authorised to provide services to retail clients. Around 270 of those licensees, being deposit takers or insurers, are also prudentially regulated by the Australian Prudential Regulation Authority (APRA) and are not required to have compensation arrangements under s912B.

 

Feedback is invited from industry by the 1st June on specific questions of:

  • The current compensation arrangements;
  • Insurance market
  • ASIC’s requirements for professional indemnity insurance
  • The process for claiming compensation
  • Premium and payout experiences
  • Your experience of the effectiveness of current compensation arrangements


The Financial Planning Association (FPA) has supported the paper’s claim that a simple last resort compensation fund is not the silver bullet solution.


“An appropriate solution needs to take into account the industry’s concerns around compensation gaps arising from a failure to engage in adequate liability considerations,” FPA Chief Professional Officer Dr Deen Sanders said.


“The government also needs to avoid the potential for an even worsening skewing of the market to adviser liability for all financial failures by ensuring consumer expectations are appropriately balanced with the complexity of multi-layered and inherently risk associated financial services products.”


The consultation paper is available at http://futureofadvice.treasury.gov.au/content/Content.aspx?doc=consultation/compensation_arrangements_CP/default.htm