We recently commented in an article about the poor outcomes for clients where the Ombud ruled in favour of them, but where the respondent was unable to pay the costs awarded by the Ombud.
An Australian e-newsletter recently carried an interesting story which may address this issue.
An independent Senator, Nick Xenophon, called for the introduction of a statutory compensation scheme to support victims of poor financial advice. He proposes using models currently in operation in the UK and Europe, and to consult with the public, consumer watchdogs and financial institutions.
The draft scheme that he proposes will set out the criteria under which compensation will be paid, caps on compensation, and contributions to be paid both by the industry and government.
“Not only should industry contribute to such a scheme, but government should too because of systemic failures of our corporate and financial watchdogs,” Mr Xenophon said.
There was mixed reaction to the proposal:
At the Senate’s hearings in Canberra on Tuesday, both Mr Dastyari (another senator) and Mr Xenophon questioned the heads of the major institutions on whether the industry needs a compensation scheme to help all victims of financial advice.
While ANZ Banking Group deputy chief executive Graham Hodges acknowledged that a scheme would play a key role in assisting victims, he did distance the banks from the idea of contributing to the scheme, stating they have “sufficient financial strength” to self-insure.
Macquarie Group chief executive Nick Moore said while Macquarie was against the idea initially, he would be open to discussions about such a scheme, adding that it would assist with the transition of financial advice to becoming a profession.
“For the community to have trust in our financial system, there must be a system to provide a remedy where there has been financial misconduct,” Consumer Action Law Centre spokesperson Gerard Brody said.
There were some interesting comments on the article, with one respondent saying that if such a levy was imposed in place of PI cover, it would make a lot of sense. If one considers how PI cover premiums escalated beyond affordability in the UK, this could actually work far more effectively.
By pooling all levies towards a central fund, the chances that a “victim” will not be reimbursed is slender. Where a FSP faces multiple claims, but only holds the obligatory R1 million PI cover, the chances of him reimbursing all the clients are slim.
This would also allow for the current limit of R800 000 in FAIS Ombud rulings to be lifted in order to address cases where clients suffered bigger losses.
Another aspect raised by a reader of the Australian article concerns the banks suggesting that they self-insure. As things currently stand, product houses are never in the firing line. Attempts at involving them in their capacity as directors failed, while a determination by the Ombud to include a key individual is currently before the appeal board.
The RDR proposals contain elements of greater accountability from insurers concerning the conduct of contracted advisers:
Standards will be set regarding a product supplier’s responsibility in relation to the conduct of tied advisers, multi-tied advisers and IFAs respectively.
- A product supplier will be fully responsible for the advice provided by its tied advisers.
- In view of the relationship between multi-tied advisers and product suppliers – which by definition is not entirely at arms’ length – product suppliers and multi-tied advisers will be expected to share responsibility for the quality of advice provided to their shared customers, as opposed to the current framework which places this responsibility almost entirely on the adviser.
- Where IFAs are concerned, product suppliers will be required to take responsibility for certain specific aspects (somewhat more limited than in the case of multi-tied advisers) of the conduct of IFAs who provide advice on their products
Churning is possibly the single biggest source of miss-selling. Only time will tell if the recent compliance audit by the FSB and the ASISA Standard on replacements will address the issue.
We look forward to your views on this as a possible option to address shortcomings in the current legislation which leads to poor outcomes for clients. Please send your comments to me at firstname.lastname@example.org.
Who knows, we may even follow the Australian senator’s lead and come up with a workable proposal for the Regulator to consider.