Treasury is seeking feedback on ways to “enhance the effectiveness” of professional indemnity insurance under a push to improve the Compensation Scheme of Last Resort.

The consultation was flagged at last week’s announcement of a $47.3 million special levy for the scheme by Financial Services Minster Daniel Mulino. The scheme is for consumers to recover unpaid Australian Financial Complaints Authority compensation determinations.

“This paper seeks stakeholder feedback on the current operation of professional indemnity insurance and opportunities to enhance the effectiveness of PII in the context of the CSLR,” Treasury says.

“A more robust ‘first line of defence’ to fund consumer compensation could support the broader sustainability and purpose of the CSLR.

“However, consideration of proposals to enhance the effectiveness of PI in responding to claims for compensation must also be viewed in the broader context of the supply, quality and pricing of PI insurance and any related regulatory or business costs for licensees.”

According to the paper, stakeholders have suggested consideration of “the arrangements applying to PI is needed to explore whether any changes can be made to support its effectiveness as first responder to consumer compensation claims. Stakeholders have suggested that enabling PI to better respond to consumer compensation would support the CSLR to be a genuine last-resort mechanism.”

Financial services licensees are required to have adequate consumer compensation arrangements and it is common for licensees to use PI.

“Although PI is not a product that is designed to protect consumers directly, it is an important first line of defence to protect consumers against uncompensated losses,” the paper says.  

It says the CSLR is designed to compensate consumers only after all other avenues have been exhausted, including any recovery from the insolvent firm or its PI insurer.

“The CSLR operator itself does not have the ability to claim against a company’s PI policy, or powers that enable it to stand in the shoes of the company for that purpose. Recovery efforts are generally left to the company’s insolvency practitioners or AFCA processes.”

Submissions must be provided by February 13. See details here.

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