The Commonwealth Treasury


COMPENSATION FOR LOSS IN THE FINANCIAL SERVICES SECTOR ISSUES AND OPTIONS September 2002

Close Window

Chapter 12: Conclusion

328. This paper has been written to promote discussion of the many issues surrounding the subject of compensation for loss in the financial services sector. The purpose is to initiate discussion of such issues as the justification for compensation arrangements, their purpose and on whom responsibility should be imposed for making them. Even where this paper indicates a tentative conclusion, you should feel free to challenge it.

329. Market licensees and, to varying extents, financial service providers have been required to have compensation arrangements before the Financial Services Reform Act applied to them. That Act made only modest reforms to the requirements applying to market licensees. However, it also introduced a general requirement that financial services licensees who provide financial services to retail clients have arrangements for compensating persons for loss or damage suffered because of breaches of the relevant obligations under Chapter 7. The purpose of this review is to re-examine these requirements. As is indicated, this involves a multitude of issues on which your contribution is sought.

330. Any broad statutory scheme would be a major change for Australia and needs careful consideration — Is it warranted? If so, how should it be structured and funded, and what claims would it cover? Is there a justification for a statutory scheme limited to market transactions or market participants? What obligations to make compensation arrangements should be imposed on financial services licensees and how do they relate to any market or broad statutory scheme?

331. The financial services industry is still adjusting to the Financial Services Reform regime, which commenced on 11 March 2002. Adjustment will continue over the next two years while financial service providers transition from their current regulatory regimes into the Financial Services Reform regime. Further changes and any further regulatory burdens must be justified, their impact on business large and small considered, and the wide range of services and products covered by the new regime carefully assessed.

332. Our hope is that participants in the industry will bring to the debate of the significant issues raised in this paper their individual experience and knowledge, while taking account of the wider context. There is a need for a balanced approach amongst the competing priorities in this exercise. Both the costs and benefits of any proposed scheme need to be taken into account, as do the range of financial services that can be subject to compensation arrangements, and the incentives on the financial service provider to behave and on consumers to make whatever checks they can.

333. `Consumer protection' cannot be considered in isolation. As indicated in subsection 1(1) of the Australian Securities and Investments Commission Act 2001, one of the aims of ASIC is to promote the confident and informed participation of investors and consumers in the financial system, while at the same time paying due regard to costs, efficiency and the development of the economy. That sentiment applies equally in relation to this review.