The Federal Government has released a discussion paper as part of its review of the need for, benefits and costs of a compensation scheme for investors who lose their money through the misconduct of a financial service provider.


The review was announced in the Future of Financial Advice package in April last year as a response to recommendation 10 of the Ripoll Report (November 2009).


The consultation paper, Review of compensation arrangements for consumers of financial services,  has been prepared by financial services and corporate governance expert Richard St. John.


Currently, arrangements are in place to protect consumers of financial services, including through access to low cost dispute resolution schemes and to compensation arrangements for those who suffer loss or damage from a breach of a statutory obligation by a licensed financial service provider. This allows, for example, compensation for a loss resulting from a provider's misconduct.


In his paper, Mr St. John observes that 'the current default arrangements', which rely largely on professional indemnity insurance, 'provide a measure of assurance but no guarantee that retail clients will be able to recover compensation to which they may be entitled'.


The problem for consumers is where a provider does not have recourse to professional indemnity insurance cover and does not have the financial capacity to pay compensation.This may be the case where the provider has ceased to trade or has become insolvent.


The consultation paper draws attention to a number of ways that existing compensation arrangements can be strengthened. These include a more proactive administration of the requirements for professional indemnity insurance, giving more attention to the financial resources held by a provider, as well as a scheme of last resort to provide compensation where a provider is unable to do so.


Mr St. John is inviting comment on the issues raised and preliminary observations made in the paper.


Formal submissions are invited over the next six week period. Consumers, licensees and insurers are invited to participate in the consultation process.


The paper is available at