A new, mandatory compensation scheme that covers consumers who have received poor financial advice from defunct financial advisers should be brought into effect, the Australian Bankers’ Association has urged.
Writing to Professor Ian Ramsay, chair of the Independent Expert Panel’s review of the financial system external dispute resolution (EDR) framework, the ABA called for the establishment of a new “mandatory, prospective compensation scheme that covers consumers who have received poor financial advice, but haven't been paid compensation awarded by an ASIC-approved external dispute resolution scheme because the financial adviser is no longer in business”.
According to Diane Tate, the ABA’s executive director – retail policy, this Last Resort Compensation Scheme (LRCS) should be available “when no other redress avenues are possible".
The ABA argues that this would “help build confidence in the financial advice industry”.
The letter to Professor Ramsay states: “The ABA believes a LRCS represents the final element of a significant reform program already underway to professionalise the financial advice industry, including implementation of the Future of Financial Advice (FOFA) reforms and higher professional, ethical and education standards.
“Establishing a LRCS covering financial advice is an important part of financial advisers forming a profession and access to the LRCS is a benefit arising from seeking advice from an authorised financial adviser.”
However, the ABA says that any LRCS should be accompanied by other measures to “Reduce the likelihood of unpaid EDR determinations”.
One-stop shop for complaints
As well as calling for a new compensation scheme, the ABA reiterated its support of a “one-stop shop” for complaints across all financial institutions, in a bid to more effectively manage customer complaints both internally and externally.
Currently, there are three existing EDR schemes, which some have said creates confusion for consumers.
Ms Tate commented: "External dispute resolution is an important alternative to the courts, and to meet its purpose it should be easy for consumers to know where to go to get their problem resolved, if they’ve not been able to with their bank or other financial institution.
"We can strengthen the current system by having a single path for people to take their complaints initially, rather than multiple paths. This could be an overarching gatekeeper which directs people where to go to progress their complaint.”
The ABA is also calling for an increase in the monetary and compensation limits “to ensure appropriate access to EDR by retail and small business customers”.
This would involve raising the value limit of disputes to $1 million and raising compensation awards to $1 million to ensure the framework “remains fit-for-purpose to support small businesses”.
The ABA argues that the EDR schemes should hear small business disputes that are similar to retail disputes (such as general insurance, credit product and transaction accounts designed for the retail market) to “ensure simplicity and clarity for small businesses on where to go to have their disputes heard and maintain efficiencies”.
However, it calls for a revised test for small business (taking into account the number of employees, turnover, size of loan or investment, and credit exposure), to “ensure the ongoing efficiency and accessibility of EDR schemes for genuine small businesses and reflect the intention that EDR is an alternative dispute resolution process for small and less complex disputes”.
The ABA concluded that it “supports simplifying the current external dispute resolution system, creating an easier ‘one-stop shop’ model and expanding the scheme so more small businesses can have complaints heard without needing to use the courts”.