A report into Compensation arrangement for consumers of financial services, prepared by Mr Richard St. John, has been released. The report highlights the need for  appropriate avenues for compensation for retail consumers of financial services.

 

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;
  • concludes that it would be inappropriate at this point in time, to introduce a 'last resort' compensation scheme, without first strengthening the existing compensation arrangements;
  • recommends 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, and
  • suggests that consideration be given to the merits of product issuers being required to take greater responsibility for protecting consumers of their products and recommends a more detailed and targeted review into these arrangements.

 

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 and examines the existing compensation arrangements available to consumers of financial services and assesses the need for the introduction of a statutory compensation scheme.

 

Mr St. John concluded that if the current arrangements are reinforced then '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 counter‑productive to introduce a last resort compensation scheme at this stage'.

 

Introducing a last resort scheme without strengthening the existing arrangements first would have the effect of imposing on better capitalised and more responsibly managed licensees the cost of bailing out the obligations of failed licensees.

 

The Government is seeking feedback from on the recommendations in the report and will take into consideration any recommendations resulting from the Parliamentary Joint Committee on Corporations and Financial Services' (PJC) inquiry into the collapse of Trio Capital before responding to Mr St. John's report.

 

The Minister for Financial Services and Superannuation, Bill Shorten said the Government was committed to ensuring consumers have access both to strong regulatory protections and appropriate compensation arrangements.

 

"To this end, I welcome the insights provided by Mr St. John, and look forward to the recommendations of the PJC and will be giving the recommendations full consideration to ensure the arrangements in Australia provide all necessary protections."

 

We will consider Mr St John's recommendations carefully, including issues such as how any last resort scheme would be funded given that the entities in question are not APRA regulated and therefore are not subject to normal industry levies."

 

The Government anticipates finalising its formal response to Mr St John's report in the next three months.

 

Submissions on Mr St. John's report are due by 6 July 2012. The report is available on the Future of Financial Advice website.