Two industry groups have welcomed the introduction of legislation to establish a Compensation Scheme of Last Resort, albeit with some reservations.
Stephen Jones, the Assistant Treasurer and Minister for Financial Services, has announced that the Government is introducing legislation to establish a CSLR “…to ensure Australians continue to have trust and confidence in the financial system external dispute resolution framework.”
He says the CSLR will facilitate the payment of compensation of up to $150,000 to eligible consumers who have a determination from AFCA relating to personal financial advice, credit intermediation, securities dealing and credit provision which remains unpaid.
The Government will contribute towards the costs of the scheme in its first year of operation, which is proposed to commence from 1 July 2023.
“The scheme will be fully industry funded through a levy on relevant financial service and credit licensees in the subsequent years of the scheme’s operation,” Jones says.
In response both the FSC and the FPA have welcomed the introduction of the legislation, although the FPA is concerned about the scope of the scheme.
FPA CEO Sarah Abood says the measure that results in consumers receiving compensation for bad advice is a positive one and that a CSLR promotes trust amongst consumers in the profession, ensuring that if money has been lost due to poor advice, compensation will be available.
“We are concerned however that the scope of this scheme does not ensure that consumers are covered for the full range of matters considered by AFCA including managed investment schemes (MIS).
“While it was in Opposition, Labor suggested amendments which would at least include MISs in the CSLR, and it is disappointing that these changes have not been included in the Bill.”
She notes that at present, after nearly four years of operation, there is $3.7 million in unpaid AFCA determinations relating to financial advice due to insolvency.
“Yet MIS operators have $6.4 million outstanding against them at present. The total unpaid determinations are $14.7 million across all the areas AFCA manages.”
Abood says this makes it clear that the CSLR must extend across AFCA’s remit, to achieve its aims of ensuring that victims of financial misconduct can be compensated where the firm involved has become insolvent.
“It’s also critical that the scheme be funded equitably and the administration costs of a CSLR should be closely monitored to ensure that cost recovery from industry primarily compensates consumers rather than covering bureaucracy and administration,” she says.
…the scheme is rife with moral hazard that must be carefully managed…
CEO of the FSC Blake Briggs says the Government is right to take a cautious and prudent approach to the final design of the proposed compensation scheme “…as the scheme is rife with moral hazard that must be carefully managed.”
He says the financial services industry recognises consumers impacted by financial advice failures often incur significant losses that should be compensated “…but at the same time this must be balanced with the fact the companies funding the scheme take responsibility for the quality of their advice and do not contribute to unpaid claims.”
Briggs says that to avoid incentivising unnecessary risk taking by unscrupulous firms, “…it is necessary to place sensible limits on the extent to which responsible financial service providers are expected to underwrite the misconduct of their competitors.
“The Government has got the essential features of the scheme correct, including a $150,000 cap on individual claims and a focus on financial advice failures.”
He says the industry’s collective goal “…should be a compensation scheme that is rarely required as adequate capital levels and professional indemnity insurance obligations for financial advisers result in minimal unpaid AFCA determinations.”
“Recent advice failures appear to have increased the backdated costs of the compensation scheme significantly, reinforcing the FSC’s view that costs could easily get out of control if the scheme was not appropriately targeted and controls on the design of the scheme are necessary.”
Briggs says the Government must ensure the scheme is efficiently operated “…or Australia will end up like the UK, where financial service companies and their customers are facing a billion pounds in annual costs.”
The FSC also recommends that AFCA takes steps to ensure all claims are eligible and the causes of losses are appropriately attributed, the scheme operator must fully enforce subrogation rights, and these provisions apply equally to backdated claims as they would when the scheme is operational.
