Canberra Must Do More To Assist Victims Of Dodgy Financial Planners
The Age
Wednesday December 20, 2006
IT IS quite dismaying that the Government has again wimped out of properly looking after the victims of conflicted and/or incompetent financial advisers.
Last month Chris Pearce, parliamentary secretary to the Treasurer, issued the fourth hopelessly inadequate proposal in as many years to deal with the hopelessly inadequate arrangements for compensating victims of financial services licensees. Not only does it make the Government and its agencies look heartless and inept, it ill-serves the majority of decent financial advisers doing their best to help their clients increase their wealth in relative safety. The fact that a year after the Westpoint collapse, only four out of 4000 investors have received any compensation from their financial planners, and that redress for the rest is winding its way through the courts and may never arrive, ensures that Westpoint remains a blight on financial services regulation in this country. For most victims, any prosecution of Norm Carey and the others responsible for the Westpoint scam will be cold comfort if those who flogged their fly-blown promissory notes for 10 per cent commissions get off scot free. Under section 912B of the Corporations Act 2001, financial licensees who provide a service to retail clients must have arrangements for compensating them for losses suffered as a result of breaches of their obligations, but the Government has never spelled out what that means. The Australian Securities and Investments Commission (ASIC) and the Financial Industry Complaints Services (FICS) have had to muddle along as best they can. In early 2001, at the same time as the new Corporations Act was passed, the then Minister for Financial Services and Regulation, Joe Hockey, asked the Companies and Securities Advisory Committee (CASAC) to report on compensation arrangements, which it did in September that year.Nothing happened. Then in September 2002, Hockey's replacement, Ian Campbell, parliamentary secretary to the Treasurer, issued an issues paper setting out the various alternatives for dealing with compensation.Nothing happened. Then in December 2003 a new parliamentary secretary to the Treasurer, Ross Cameron, issued a position paper prepared by Treasury entitled Compensation for Loss in the Financial Services Sector.Nothing happened. In March 2004, the introduction of Financial Services Reform (FSR) brought a new licensing regime for financial advisers, including an absurd level of disclosure that has proved counter-productive (because it is too much for most people to read, so there is, effectively, less disclosure now). But while overdoing disclosure, FSR ignored compensation. It contained no formal guidance for licensees meeting their obligations under S.912B of the act.Now Treasury, via Pearce, has issued another paper on the subject containing five options. They are: do nothing; require professional indemnity (PI) insurance with no detailed prescription; require PI insurance with detailed prescription; a centralised fund; security bonds lodged by each licensee. The paper recommends option two (PI insurance of whatever level and type that a licensee wants). The reason that this is hopelessly inadequate is that PI insurance is usually compromised by many exclusions and, in any case, is designed to protect the service provider, not the client. It is ineffective when the licensee goes broke. The problems are well displayed in the FICS submission to Treasury on its paper, which contains a fascinating narrative on its attempts to get compensation out of an adviser called Deakin Financial Services over the Westpoint collapse. There have been 16 complaints to FICS from Deakin clients who invested in Westpoint. Deakin argued that FICS did not have jurisdiction because of a technicality (that is the investments were promissory notes not managed investment schemes). FICS issued proceedings to enforce its jurisdiction, but two working days after the hearing, on November 8 this year, Deakin announced it had placed itself into administration. FICS says: "As a result of s.440D of the act, it is unlikely that legal proceedings may be brought directly against Deakin by aggrieved clients, and so their only options are to bring a complaint to FICS, or to await the outcome of the administration."According to the administrator, Deakin has very few assets which are outweighed by its established liabilities, as well as currently having received complaints from 66 clients to date with a combined potential exposure of $8.65 million. The total potential exposure is $21.9 million, as a result of 190 clients being advised to invest in Westpoint."Deakin's professional indemnity policy is full of exclusions that make it virtually useless.Some of these are: Claims relating to products not on the licensee's approved list are excluded; claims relating to derivatives are excluded; claims relating to services provided as a fund manager are excluded; claims relating to guarantees, warranties or indemnities regarding investment performance or return are excluded (this could extend to exclude many complaints of misrepresentation about performance, a common category of complaint to FICS); claims relating to misleading or deceptive conduct other than those in respect of alleged actual misleading or deceptive conduct under ss12DA, 12DB or 12DF of the ASIC act; and claims relating to computer hardware or software are excluded. In its submission, FICS gave several other examples of financial advisers who had either gone into administration to avoid paying Westpoint compensation or who had simply scarpered. For the Government to think, despite what is going on with Westpoint, that unspecified PI insurance will be enough to protect financial services consumers is bewildering.Do the government officials, in their hearts, believe Westpoint victims were greedy and got what they deserved? If so, they are utterly out of touch. Clearly there should be a combination of PI insurance and a centralised fund - similar to the National Guarantee Fund (NGF) for sharebrokers, administered by the Securities Exchanges Guarantee Corporation. The NGF does not cost the earth and does not clag up the operation of the sharemarket. FICS could, and should, administer a similar fund for financial planners - for when all else fails. Alan Kohler publishes Eureka Report, a newsletter financially backed by Carnegie, Wylie & Co. The views expressed here are Kohler's alone, not Carnegie Wylie's.-- ak@eurekareport.com.au
© 2006 The Age
