Cost pressures arising from the formation of the Financial Ombudsman Services’ (FOS) proposed compensation scheme would place a heavy toll on Australian financial services licence (AFSL) holders, with the end investor ultimately paying a higher price.
A number of AFSL holders have hit out in opposition to FOS’s proposed Financial Services Compensation Scheme (FSCS), saying the proposed 1 per cent revenue levy would create further costs on top of already pricey professional indemnity cover, create an uneven playing field and further push up costs for clients.
“The levy of 1 per cent is quite a heavy cost that would have to be passed on to the consumer, particularly with everything else that’s going on with FOFA [Future of Financial Advice],” Professional Investment Services group managing director Grahame Evans said.
“In our [submission to the government’s compensation consultation paper] we think there is a whole range of different places where failure can occur so we need to get other parties, particularly the funds management industry paying their part of this equation as well.”
Evans said the inclusion of Australia’s funds management industry in any proposed new levy would fairly reflect the number of product failures in Australia.
Futuro Financial Services director of network services Paul Kelly said Futuro would be in favour of a scheme that sought to “fill the gaps” of fraud and misappropriation of funds and with the involvement of the funds management industry a scheme would be appropriate.
Lifespan Financial Planning managing director John Ardino said he would not be in favour of a last resort scheme based on a percentage of licensee revenue as he believed it would not produce the size of compensation pool needed.
“As I have advocated before, the best way to raise meaningful capital for a compensation scheme is to levy a basis point charge on all financial products, where the levy increases with the risk of the product,” Ardino said.
“I know fund managers are horrified at this proposal, but the funds for an adequate compensation pool over and above PI (professional indemnity insurance)-based compensation are to be found at the government level and the fund manager level, not the adviser level.”
Dixon Advisory managing director Alan Dixon rejected FOS’s proposed scheme, claiming it was unfair for licensees to be hit with yet another levy when many in the industry were already paying huge PI premiums.
“I’d rather have ASIC do an education plan where you say ‘look things might go wrong with your financial adviser and if they do make sure you choose a firm that will be there if you choose to take them to FOS or to sue them’,” Dixon said.
“If there was some sort of optional scheme and then consumers voted with their feet, then I’d prefer to pay 1 per cent higher fees and know my advisers in that scheme.”
However, he said the reality was that most clients of bigger, more reputable firms did not want to pay higher fees as they knew the firm was financially stable.
My Adviser chairman Michael Summers said the concept of a universal scheme to provide last resort compensation was commendable, however, it would be “unfair and unrealistic commercially”.
“When all members of the industry are doing the right thing by the community, a universal scheme might have legs,” Summers said.
“Until then it runs the risk of driving some of the better performers out of the game. Sorry FOS – it’s wrong and it won’t work.”
Last week, FOS used its submission to the compensation review to place its previously proposed FSCS back on the agenda.
