Calls Continue for 'Retrospective' Fund To Compensate Financial Advice Victims
Wednesday 10 August 2016 @ 11.41 a.m. | Corporate & Regulatory | Trade & Commerce
Recently, ABC News has reported on calls from consumer advocates stressing the need for a ". . . fund of last resort for people who have lost money through poor financial advice". The ABC News report refers to a NSW Supreme Court decision which is said to show very clearly the need for such a fund to be established.
A Recent Case Highlighting the Issue
The case referred to involved the insurers of the now liquidated (in 2011) and bankrupt (in 2012) Navra Financial Services and two of its customers, the McShanes. In that matter the two customers of the Financial Services company lost their home, superannuation and savings as a result of a series of bad investments they made through Navra Financial Services. In 2012, the case was lodged against Navra Financial Services in the NSW Supreme Court, and after a long period of time a settlement was reached, funded by Navra's business insurer.
The long court proceedings, and difficulty in obtaining a settlement, which ultimately saw the two customers having to resort to dealing with insurers is what the case highlights and why consumer advocates including CHOICE say the case ". . . underscores the need for a fund of last resort for people who have lost money through poor financial advice".
Effect of Poor Advice Far Reaching
Even though the McShanes' matter was settled, as the ABC reports, dozens of other former Navra clients will only receive a fraction of what they would claim - this is so, even though Navra was insured for various amounts reported to range from $4 to $8 million. To put it into perspective, the company managed large sums of money for up to 500 clients and while a settlement scheme was set up through the Navra insurers and liquidators - it is unlikely to be able to cover the total likely claims reported to be in the order of $30 million. It is reported that to date, 82 former Navra clients have applied for part of the $4 million worth of insurance and it is expected that when all claims are made that will far exceed $4 million.
A Compensation Fund of Last Resort
The ABC reports that at least 20 people complained to the Financial Ombudsman's Service (FOS) in 2011 about Navra Financial Services but the fact that within a month, Navra was bankrupt, stopped that avenue's availability for consumers to pursue financial redress, leaving the courts as the main place to seek redress and the clearly under funded insurance as unlikely to be able cover all the claims.
The above are the reasons a "fund of last resort is needed". The fund would be available to all victims of financial loss, as a spokesman for the Consumer Action Law Centre (CALC) is quoted as saying:
"It would be available for those who have suffered loss and have succeeded in getting an award because of negligent financial advice or a breach of law, through the Financial Ombudsman's scheme or a court, . . . They [the victims] would first have to call on professional indemnity insurance and if not, they could call on this compensation scheme, hence it being last resort."
Advocates for the fund are also calling for it to be retrospective, saying that the fund is a good idea going forward but must also address the past 10 years victims of financial fraud from within the financial industry who have had no form of financial redress.
CHOICE and Others Continue to Lobby
In a recent article on its website, CHOICE has continued its call for the government to place a levy on financial institutions to develop a last-resort fund. This call, CHOICE says on its website, is being resisted by the banks, citing the Australian Bankers Association (ABA) who, CHOICE says has argued that:
". . . the focus should be on the companies who have done the wrong thing. ABA Chief Executive Steven Munchenberg has stated publicly that larger banking institutions are resourced well enough to deal with compensation claims already, and shouldn't have to pick up the tab when it comes to the mistakes of other organisations.'
CHOICE argues such a scheme is the missing piece of the financial system regulatory system saying:
"Those who support the introduction of the scheme (including CHOICE) argue it is effectively the missing piece of the financial services regulatory architecture, and the only way to ensure that consumers who suffer loss from their adviser's misconduct are compensated."
The article points out that around a quarter of consumers entitled to compensation as a result of bad advice on investments, life insurance and superannuation haven't been compensated, and that:
"The latest report from the FOS reveals there were 26 financial service providers unwilling or unable to comply with 120 FOS determinations made in favour of consumers. This has affected 176 people and the value of the outstanding amounts awarded by these determinations was a whopping $12,686,956.69 plus interest (as at 31 December 2014)."
This will be a developing area in banking and finance and will no doubt come up more discussion now that the Federal Government is likely to be getting the banks to report to it on an annual basis and appears to be wanting more scrutiny of how the banks operate at nearly all levels.
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