Joint bodies call for more transparency, preventative action in PII scheme

Last Friday (13 February), Treasury closed consultation for its post-implementation review of the effectiveness of its recently-imposed professional indemnity insurance (PII) scheme, Compensation Scheme of Last Resort – enhancing professional indemnity insurance.

The Compensation Scheme of Last Resort (CSLR) was established in 2024 to ensure that customers who have suffered losses due to misconduct in the finance sector could access ‘last resort’ compensation when all other avenues were exhausted, such as when their financial advisers had been declared bankrupt.

In a joint submission to Treasury’s review, industry bodies CA ANZ, CPA Australia, the Institute of Public Accountants (IPA), and the SMSF Association warned that the CSLR should not be seen as the solution to systematic failures in the retail financial advice sector.

“The solution to these large-scale systematic failures is improving the monitoring and timely enforcement of our complex, yet robust, regulatory framework – as evidenced by the extensive regulatory actions taken by the regulator after these events have transpired,” the joint submission read.

“We need to explore how the regulatory framework can be flexed to prevent, detect and readily respond to instances of poor conduct, inherent conflicts of interest and even fraud before they become large-scale systematic failures resulting in significant consumer losses.”

The joint bodies argued that the government should focus on restoring sustainability to the CSLR by proactively addressing systemic issues in the financial sector.

Furthermore, they submitted that Treasury should make it mandatory for PII claims to be reported whether they were paid, unpaid or declined. The joint bodies said this would provide data needed to understand and evaluate the effectiveness of PII.

When asked whether the existing regulatory model was effective in reducing risk for consumers, the joint bodies said the model was “broadly appropriate.” However, they argued that the PII was not designed to cover losses resulting from product failures.

“The purpose of PII is to protect the insured, being the AFS licensee, against the risk of financial losses arising from poor quality services and other misconduct by its representatives,” the submission read.

“Importantly, PII is neither intended nor designed to respond to product failure or claims as a result of the failure, for example insolvency, of a product issuer.”

They noted that AFCA's approach in assessing determinations appeared to contrast with this view, where financial advisers were expected to bear responsibility for product failures as ‘gatekeepers.’

Due to the lack of available data, the joint bodies added that it was unclear how many PII claims were paid for anticipated insured events, such as poor quality services and misconduct, versus for advice connected to a product failure linked to larger, systematic issues.

“Because of the scale and nature of these systematic events the AFS licensee has ceased to operate, for a variety of reasons, the CSLR becomes a default compensation scheme rather than a true compensation scheme of last resort,” the submission said.

It added that it was impossible to prevent all instances of product failure, but that the industry continued to see large consumer losses due to inadequate governance, failure to manage conflicts of interest and fraud-related investment risk.

“The Joint Associations recommend that [a] comprehensive review of the risks of product and advice failure must form part of a review of the CSLR to ensure its sustainability and ensure that it operates as a true compensation scheme of last resort.”