The FAAA continues to have some reservations about the effectiveness of the Compensation Scheme of Last Resort.
In noting the passage of The Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023 and associated bills through both houses, the association says many of the concerns it expressed previously, remain.
FAAA CEO Sarah Abood says an effective CSLR will promote trust in financial advice among consumers – by ensuring that if retail consumers have lost money due to poor advice, there is a compensation mechanism available (see: CSLR Legislation Passes.)
“However, the legislation has not changed substantially from previous drafts, and many of the concerns we expressed previously remain.”
She notes that a major source of consumer harm in the sector is MIS failure “…and this isn’t covered in this legislation. We acknowledge that a review into the regulatory structure of MISs has been announced, and this is a positive step. However this could take some time, while consumers remain unprotected from failures in this area.”
Abood adds that it’s important to acknowledge that advisers will not be bearing the setup costs or those in the first year of operation but “…we must ensure that all previous cases are fully dealt with in the first year, to ensure that current advisers are not being asked to pay for failures caused by those no longer in our sector.”
…There are estimates as high as $1,250 per adviser if the sector cap of $20 million were to be reached…
That said, the FAAA does have “…concerns that the running costs of the scheme after the first year may be onerous for advisers. There are estimates as high as $1,250 per adviser if the sector cap of $20 million were to be reached, with an expected amount closer to $375 per adviser (if running costs are closer to the estimate of around $6 million a year).”
She adds the industry “…really will need to keep any eye on those running costs and ensure they are reasonable.”
While appreciating that changes have been made to increase the disincentives for companies and their directors to resort to the scheme, Abood says an additional practical step would be “…to launch the previously-flagged review of the professional indemnity insurance market, as a properly functioning PI sector would help ensure the CSLR is firmly positioned as a last resort, if things go wrong.”
