Errant financial services providers are yet to pay at least $15 million in compensation owed to 174 consumers whose complaints have been upheld by the Financial Ombudsman Service (FOS) since 2010.
This alarming disclosure is made in the Financial Ombudsman’s final submission to the government’s public consultation of the Financial System Inquiry.
In the submission, the FOS revealed that the value of unpaid compensation is blowing out by $1 million every three months because of interest penalties and inflation.
The big concern is that public trust in the service is being eroded because financial institutions are unable or unwilling to pay compensation in cases where they failed to meet obligations to customers.
FOS chief ombudsman Shane Tregillis told The New Daily that confidence in the financial services industry was being undermined by the backlog of unpaid compensation cases.
“Its important that where consumers have complaints upheld that they are paid whatever compensation was due to them,” he said.
The average value of the unpaid compensation, most of which relates to cases involving financial planners, is $86,206 for each claim.
The compensation is owed by 26 financial institutions that have not complied with 120 decisions of the FOS.
FOS is the largest dispute resolution scheme in the financial services sector and is able to award compensation of up to $309,000 on consumer claims against banks and other financial institutions.
Renewed push for last resort compensation fund
Pressure is mounting on banks and other institutions to establish a special compensation scheme to protect consumers who are owed compensation by collapsed financial planning firms.
Mr Tregillis said that many consumers were not being compensated for poor financial advice because some financial services providers had entered administration or their assets were put in the hands of liquidators soon after FOS decisions were made.
In such cases, consumers who have won binding determinations from the ombudsman scheme have been left high and dry.
Despite repeated efforts by the Australian Securities and Invesments Commission to get the industry to address the problem, consumers still do not have a last resort fund that would pay compensation when their financial provider fails.
FOS supports the establishment of such a fund, which would be funded by a levy on financial institutions and only accessible to consumers as a last resort.
“We believe this is the missing piece in the current package of regulatory reforms under discussion to improve the confidence and trust in the financial advice sector,” Mr Tregillis said.
CHOICE’s head of campaigns Erin Turner said the financial services industry had an obligation to ensure that people owed compensation were paid.
“There needs to be a last resort scheme,” she said.
“These companies have gone bust and they’re now not around to clear up the mess.
“It’s a scary predicament that these consumers now find themselves in.”
Senator pushes for change
The New Daily has learned that consumer advocates and peak industry bodies such as the Australian Bankers’ Association and the Financial Planning Association have held “fruitful” talks in recent aimed at resolving the problem.
However, the parties have not been able to reach agreement on terms for setting up a last resort scheme.
Last week independent South Australian senator Nick Xenophon said he was drafting a private members’ bill to impose a special compensation scheme on the financial services industry.
“Even if there has been a finding of fraud or a breach of corporations law the chance for redress for a victim is slim because of the enormous costs in pursuing a case,” Senator Xenophon said.
“What we have in Australia is a legal system, not a justice system.”
Mr Xenophon said his draft bill would require the federal government to make contributions to the fund because of the “systemic failures of our and corporate and financial watchdogs”.
Under the FOS proposal, only financial services companies would be required to make regular contributions to the fund.