The year has barely begun but it’s safe to predict that the banking royal commission will dominate public debate through 2018.
The commission has very broad terms of reference that allow it to examine almost any aspect of banking, insurance or superannuation. But in my mind, there's one issue that stands out from the rest: that of unpaid compensation.
One of the reasons that there were such persistent calls for a royal commission was that far too many people had been wronged by financial advisers or institutions without receiving compensation. Some of these were from large scandals like Storm Financial or Timbercorp; others simply involved small firms giving bad advice.
Many people lost their retirement savings as a result, and since many of them were approaching retirement age they now have little opportunity to make up their losses. These were people who were playing by the rules, trying to set themselves up for a degree of independence in retirement. The only way to restore some of that hope is through ensuring that they receive compensation, where they have a clear case.
Why haven’t these people been compensated already? In many cases, they worked through the dispute resolution process and a body like the Financial Ombudsman Service ordered that compensation be paid. But the firms responsible for the loss simply disappeared, or were unable to pay. Where firms had multiple claims, their funds were rapidly exhausted, sending them into insolvency.
The system only works when there’s still a firm around to pay compensation. If it disappears, there’s no safety net. While this might seem tricky, it can easily be resolved.
Through 2016/2017, I was a member of a panel that reviewed the dispute resolution and compensation framework in the financial system for the federal government. We identified more than $14.5 million in compensation that had been ordered but not paid – largely arising from inappropriate financial advice.
In our final report, released in December 2017, we recommended the establishment of a compensation scheme of last resort, to cover these types of cases.
This scheme could be industry-funded and initially focused on the financial advice sector, where most problems have occurred. This would encourage financial advice firms to work together to lift their standards, to reduce the amount that they need to pay to fund the scheme.
For now, our recommendations have been put on hold while the royal commission does its work. But I hope that the commission makes this issue a priority, because it goes to the heart of the problems that have undermined consumer trust.
Without compensation, there is no justice, and without justice, why should we place our trust in the system?
Alan Kirkland, CHOICE CEO