Greater regulatory oversight, stringent professional indemnity insurance requirements and a scheme of last resort must all be implemented to better protect victims of poor financial advice, according to Maurice Blackburn’s latest submission to the Ramsay Review.
Maurice Blackburn Principal Josh Mennen said it was evident that current external dispute resolution schemes were failing many victims of financial wrongdoing, particularly those where the financial service provider had become insolvent.
“When a financial service provider becomes insolvent, they cease to remain a member of the relevant external dispute resolution scheme, denying those consumers affected access to an important mechanism for recovering their losses,” Mr Mennen said.
“That means that for many people, whose life savings were wiped out in the Global Financial Crisis (GFC) due to negligent financial advice, their options to seek compensation are limited.
“This legal ‘black hole’ is exacerbated by the lack of regulatory monitoring to ensure that financial service providers have adequate professional indemnity insurance in place - that’s why we have called for greater regulatory oversight from ASIC and proper accountability for professional indemnity insurers who have been let off the hook in many instances.
“Consumers must also be able to take action directly against a negligent party’s professional indemnity insurer through the external dispute resolution schemes, and this is something we hope can be undertaken once the new Australian Financial Complaints Authority is established in 2018.
“When a claim is brought against a financial adviser who has responsive professional indemnity insurance, the insurer takes control of the defence and ultimately pays the claim or settlement, so why should the insurer be let off because the wrongdoer has ceased to operate? It shouldn’t.
“We have also called for external dispute resolution schemes to include registers of relevant past and current professional indemnity insurers for financial service providers, to help deserving claimants more easily access compensation.
“This will in turn lessen the burden on the industry funded scheme of last resort. That means more money will be available to compensate victims of financial misconduct when they are otherwise unable to recover their losses from the wrongdoer or its professional indemnity insurer.
“The industry funded scheme of last resort will offer a crucial safety net and will go some way to restoring public confidence in the financial services industry, but we need to get it right.
“Any scheme of last resort needs to be administered by an independent body with appropriate regulatory oversight in place.
“In our view, with reasonable exceptions, the scheme should be retrospective to relieve the mum and dad investors who lost money in the GFC due to financial misconduct but were unable to recover their losses.
“The scheme should also have the power to recover costs from firms who have failed to pay out and to pursue the directors responsible; an important measure that we believe can also help to play a role in addressing the issue of phoenixing.
“Finally, our submission also rejects the proposal of Westpac that a ‘bank-related past issues forum’ be established – in our view this is an attempt by one of the culprits of negligent advice to avoid properly funding the scheme which is so obviously needed.
“The Ramsay Review is to be commended for helping to shine a light on the many longstanding failures within the financial advice industry, and our hope is that with the adoption of important measures like a scheme of last resort that a fairer deal might at last be in sight for consumers,” he said.