The FPA is urging the Government to reconsider its plans for the scheme until the problems with professional indemnity insurance in advice are addressed.
According to the FPA, the "first line of defence" in consumer compensation should be adequate and appropriate professional indemnity cover for licensed advisers. Despite this, there has been no action on the "chronic lack" of PI cover for advisers since the St John review in 2021.
FPA CEO Dante De Gori explained: "Instead of targeting the faulty and misleading products in the market as well as fixing some of the underlying causes of most unpaid client compensation – inadequate professional indemnity insurance – the Government is now piling the full cost of funding and administering a consumer compensation scheme on the financial planning profession and exposing millions of consumers by exempting faulty and misleading products.”
De Gori said the proposed design of the CSLR results in a transfer of responsibility from "the actual offenders within the product industry to financial planning practitioners as a group".
“This is a significant departure from the principle of consumer protection," De Gori continued, "and should only be taken as a genuine last resort for providing compensation to consumers. A CSLR should not replace proper action by the regulator to hold parties responsible for their own misconduct or poor performance."
“Industry-wide compensation schemes can also worsen the moral hazard for the profession. If an unscrupulous or unlicensed persons wasn’t bothered to have proper insurance in place until now, the CSLR hardly provides an incentive for them to mend their ways."
De Gori's comments follow on from the joint statement the FPA made with 14 other consumer groups and professional associations requesting that the Government expand the CSLR beyond its current scope, which notably excludes certain financial products such as managed investment schemes.
These exclusions could have a material impact on the advice sector - both because advisers could end up on the hook for product failure complaints by default and because, as per the CSLR's funding model, the industry will be paying substantially more in levies than the other products and services included in the scheme.
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