FOS report reveals advisers owe more than $7.6m

by |
Financial advisers have been revealed as the main culprits in having outstanding compensation payments following a report on unpaid determinations by the Financial Ombudsman Service (FOS).

Since 1 January 2010, 18 financial service providers (FSP) have been unable to comply with 99 determinations made in respect of disputes brought by consumers about their conduct.

Thirteen of these – or 72% - are financial advisers, with the average unpaid amount per adviser sitting at a pretty $591,000.

In total the value of the outstanding amounts awarded by these determinations across FSP reaches almost $8.4 million plus interest at 31 December 2013.

“While affecting only a very small percentage of all FOS members and of the awards issued by FOS across all our jurisdictions in banking, insurance, life insurance and investments, this does represent a significant proportion of the determinations issued by FOS relating to disputes in the financial planning and advisory sector,” the report said.

There can be a variety of reasons for unpaid determinations, and the FOS advises that of those in the report, one of the firms is currently in administration and a further nine are in liquidation. The remaining eight have advised they have insufficient funds to meet their obligations.

ASIC is charged with the regulatory powers to investigate financial services providers that are in breach of FOS’s Determinations.

“We understand that ASIC has taken regulatory action against, or is currently investigating, many of the financial services providers who have not paid determinations,” the FOS said. “However, it is acknowledged that the outcome of ASIC’s response to these issues is unlikely to provide a solution to the issue of non-payment to consumers.”

The report revealed that many FSP have been using Professional Indemnity (PI) insurance policies as the primary mechanism of compensation arrangements.

However the relevant requirements set out by ASIC in its regulatory guides clearly state that PI insurance is not designed to protect consumers directly and is not a guarantee that compensation will be paid.

“FOS’s experience highlights that PI insurance is not by itself an adequate response to these problems,” the report said. “PI insurance of the type required to meet regulatory guidance requirements appears to be not generally available or would be too costly for small firms to obtain.”

Furthermore, this type of insurance has proved inadequate to compensate consumers where firms have gone into administration or are insolvent.

The FOS has proposed to release a discussion paper by midyear that will examine the options available to address the problem.

Possible avenues include requiring some form of ‘guarantee’ from those firms assessed as potentially at risk, and better cooperation with administrators and liquidators and reporting of relevant directors to regulators.

SEE MORE:

FOS fails to meet efficiency standards: review

Advisers ready to fight back

How to avoid Ombudsman action: 10 top tips

  • GAB on 16/04/2014 9:53:28 AM

    I would suggest if the advice industry ditched the current risk profiling methods and adopted commonsense objectives based planning, alot of claims would not hit first base.

  • Innocent Observer on 17/04/2014 2:29:15 PM

    This isn't entirely surprising, considering that the kind of businesses FOS operate with is a fairly narrow pool of banks, life insurance companies and financial advisers (and two of those groups have very deep pockets!).

    As a matter of fact, I would have expected financial advisers to make up more than 72% of those who were unable to pay.

    I think it would be interesting if FOS published a report (every 6 - 12 months) that identified the circumstances of each case. If would be interesting to see which were as a result of slack compliance or dodgy dealings, and which were the result of consumers cashing in on their "rights" (e.g., claiming that while they signed the ATP and assured the adviser they had fully understood the costs/risks, the didn't actually understand it).

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions