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ASIC research on the impacts of misconduct

by Martha.Ware 23. May 2011 08:52

Last Thursday ASIC published research on the social impact of misconduct in the financial services industry. The research, contained in Report 240 Compensation for retail investors: the social impact of monetary loss, gives examples of misconduct leading to financial losses, such as inappropriate advice, fraud, defective disclosure and misleading or deceptive conduct.

ASIC’s Consumer Advisory Panel (CAP) commissioned Susan Bell Research to conduct a study into the social impacts of investors suffering losses due to licensee misconduct in circumstances where the licensee is unable to provide full compensation. It was commissioned to better understand the personal consequences of investors not being fully compensated and to help inform submissions to the Government’s review into whether a statutory compensation scheme should be introduced in Australia.

The key findings of the study are:

  • investors who suffered the most had invested all their money, had not diversified or went into debt as part of their investment strategy;
  • most investors’ losses were associated with an underlying product that was either frozen or collapsed;
  • the impact of the monetary loss was immediate on investors without a financial buffer, for others the first six months from when they discovered their loss were critical. Most investors received none, or only a few cents in the dollar back;
  • investors had little knowledge of existing avenues of redress, such as their financial service provider’s internal dispute resolution system or the external dispute resolution scheme they belonged to;
  • investors were reluctant to commence legal action to recover their monetary loss, particularly where they blamed themselves;
  • some investors suffered ‘catastrophic loss’ as their loss was ‘so significant their life will never be the same’. Some felt prolonged anger, uncertainty, worry and depression; and
  • investors who suffered monetary loss lacked confidence in the Australian financial system, financial advisers, the government and regulators including ASIC.

ASIC encourages financial service providers to review their complaints handling processes against the requirements in Regulatory Guide 165 Licensing: internal and external dispute resolution (RG 165). ASIC also encourages the schemes, the Financial Ombudsman Service Limited and the Credit Ombudsman Service Limited to continue to widely promote their dispute resolution services so all Australian investors are aware of their right to complain to external dispute resolution schemes.

In the context of the Future of Financial Advice Reforms and as part of the Government’s review, Richard St John, published a
consultation paper on 20 April 2011 to explore the need for and cost/benefits of a statutory compensation scheme.

More information and a copy of Report 240 is available on the ASIC website.




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