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Banks open to $50m industry insurance scheme for bad financial advice

Banks open to $50m industry insurance scheme for bad financial advice
Facing the Senate (from left): ANZ deputy chief executive Graham Hodges, CBA chief executive Ian Narev, NAB chief executive Andrew Thorburn, Macquarie Group chief executive Nicholas Moore.

The big banks have provided conditional support for an industry-wide insurance scheme for clients who sustain losses from dodgy financial advice.

After Senator Nick Xenophon said on Tuesday, he would introduce draft legislation for statutory compensation scheme to provide a compensation option for victims of financial planners, ANZ Banking Group deputy chief executive, Graham Hodges said a such scheme would fill a gap in the market but said big banks should not be forced to fund it because they are big enough to pay out compensation to aggrieved clients.

In its submission to the Senate economics references committee scrutinising financial advice, Macquarie Group said such a scheme "could introduce an element of regulatory moral hazard by reducing incentive for stringent regulation or rigorous administration of the compensation arrangements".

But on Tuesday, Macquarie Group chief executive, Nick Moore was more open to a scheme to pay compensation to customers found to be financially damaged by poor advice.

"We would see this as part of the evolution of the whole financial planning industry. It wouldn't be an unexpected outcome … We are certainly open for a dialogue. We think it is an issue that needs examining," he said, pointing to other professions such as lawyers, which operate similar statutory schemes for clients who are defrauded.

Moral hazard

The idea for an industry insurance scheme was explored by the previous Labor government but was eventually rejected because of the problem of "moral hazard" which can encourage people to go into risking situations knowing that others will pick up the cost if they lose out.

Labor's senator Sam Dastyari described the scheme as a "limited scheme of last resort".

It is understood that the committee is considering a pool that could be worth $50 million and would be funded by financial institutions.

Mr Hodges acknowledged that for some financial planner groups, professional indemnity insurance was limited and could be exhausted quickly.

"You have a myriad of players...who don't have much protection in terms of insurance and if there is a systemic issue within that planner group there is the likelihood that financial planner group won't have sufficient financial muscle to right the wrong," he said.

However, the big banks should be able to self-insure, he said, rather than being made to fund the scheme. "Organisations which have sufficient financial strength and can payout as required for mistakes should be able to effectively self-insure because they have the capital behind them," he said.

Slim chance for redress

Senator Xenophon said ahead of the Senate hearing, that under the status quo, "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. What we have in Australia is a legal system, not a justice system."

Senator Xenophon said the current financial ombudsman was only able to order compensation to financial advice victims up to $150,000 but was able to assist people who had lost more.

"This is an issue that goes beyond politics when you have both Labor and Coalition senators, as well as the Greens, championing the rights of victims," he said.

Author: James Eyers
Source: The Age 

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