I however argue that it is unreasonable to expect members who comply with their obligations under the law to fund those who do not. Further, in my opinion, such a scheme could lead to more members simply refusing to pay debts, which would expose a fundamental fault in the system.

AFSL holders are required by law to maintain adequate Professional Indemnity (PI) insurance cover to ensure that clients with legitimate claims can be compensated. Of course, if a claim relates to the failure of the member to comply with the conditions of their PI policy, it is likely that the insurer will refuse to pay the claim.

So what happens then? Surely there has to be a fall-back position where licensees are required to provide sureties of some description to cover their obligations in this event.

The issue with the FOS proposal is that the obligations of the AFSL are generally covered by PI insurance if the advice is in accordance with its legal obligations. If it is not, the AFSL would probably not be covered but should be held liable in its own right due to lack of proper supervision as required under the law.

So, rather than placing the burden for those members who fail to meet their obligations on compliant AFSLs, the FOS should be lobbying for accountability by AFSLs across the board to ensure that all members have the financial resources to pay for any breach of obligation that results in consumer claims, and provide no opportunity to opt-out of an obligation to pay if found liable.

One situation of particular concern is where the licensee responsible for a retrospective claim has sold or closed down. Again, there should be some mandated transfer of obligation from one licensee to anther in the event of a sale or an obligation to maintain responsibility in the event a business folds.  

Having sat on the adjudication of the FOS predecessor FICS, I have long argued that AFSLs are insulated from claims if they simply comply with the law and do their job properly. Regardless of what many members may see as unfair outcomes, I have never seen a case found against the member where there was not a clearly substantiated case of non-compliance.

Although a requirement for sufficient financial resources may make it more difficult for industry members to obtain AFS licences, it is in the best interests of the financial services industry and consumers.