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CSLR piles more costs on the financial planning profession at a time when it can least afford it.
Sydney, 29 September 2021: The Financial Planning Association (FPA) has called on the Government to reconsider its planned Compensation Scheme of Last Resort for victims’ unpaid compensation until it fixes the problem of professional indemnity insurance in the profession.
The FPA believes individual responsibility – in this case by ensuring adequate and appropriate professional indemnity cover is in place for licenced financial planners – should be the first line of defence to address consumer compensation.
For the past nine years there has been no action to monitor insurance coverage in the profession and ensure it is adequate to provide the legally required protection for clients.
“The Government risks accelerating the exodus from the profession with yet another avoidable impost on top of the ASIC funding levy that has increased by 340 per cent over the past four years and helped put advice beyond the reach of ordinary Australians,” says FPA CEO Dante De Gori CFP®.
“Instead of targeting the faulty and misleading products in the market as well as fixing some of the underlying causes of most unpaid client compensation – inadequate professional indemnity insurance – the Government is now piling the full cost of funding and administering a consumer compensation scheme on the financial planning profession and exposing millions of consumers by exempting faulty and misleading products.”
The proposed design of the CSLR would transfer responsibility for paying compensation from the actual offenders within the product industry to financial planning practitioners as a group.
“This is a significant departure from the principle of consumer protection and should only be taken as a genuine last resort for providing compensation to consumers,” said Mr De Gori.
“A CSLR should not replace proper action by the regulator to hold parties responsible for their own misconduct or poor performance.
“Industry-wide compensation schemes can also worsen the moral hazard for the profession. If an unscrupulous or unlicenced persons wasn’t bothered to have proper insurance in place until now, the CSLR hardly provides an incentive for them to mend their ways,” Mr De Gori said.
Amid the deluge of new regulation and legislation imposed on the profession, there has been plenty of opportunities to fix the chronic lack of adequate and appropriate PI as recommended in the St John review in 2012.
Key recommendations from the review include addressing the quantum and coverage of PI insurance and regular monitoring by ASIC to ensure that financial services businesses have adequate PI in place.
To date, there has not been any action on these recommendations and problems with PI insurance continue to be the major cause of unpaid determinations.
The FPA understands that beyond initial process of obtaining an AFSL there is no proactive monitor PI insurance obligations or the PI market more broadly.
“It is a repeat of the same failings that have caused the problems with the ASIC levy for regulation of the profession – the profession as a whole is tarred by the sins of the few and the fraudulent,” Mr De Gori said.
“Not only do financial planners fund the scheme, they are also being hit for the cost of setting up a separate body to administer the scheme when this role could easily be filled by ASIC and funded by the wealthy product providers.”