Following on from the recent passage of the Future of Financial Advice (FOFA) reforms through the House of Representatives, the Government has today released a report into Compensation arrangement for consumers of financial services prepared by Mr Richard St. John following consultation with industry, consumer representatives and other interested parties.
The report acknowledges the reality that regardless of how stringent the regulations surrounding the provision of financial advice are, there are times where things do go wrong, and appropriate avenues for compensation need to be available for retail consumers.
The Government is acting to ensure that consumers are better informed about the risks associated with different investment vehicles by tackling conflicts of interest that have threatened the quality of financial advice that has been provided to Australian investors, and ensuring that consumers are better informed when making financial decisions.
"This Government takes consumer protection very seriously, and have established FOFA as a key plank in our efforts to better protect consumers."
"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" Minister Shorten said.
"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 Government has set a high watermark in consumer protection with FOFA which sadly the Opposition have not seen fit to support. I hope the Coalition will work with the Government on a resolution to the issues indentified in the report."
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.
"This Government is 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.