The Financial Services Council (FSC) said the government was “right to take a cautious and prudent approach” to the final design of the Compensation Scheme of Last Resort Levy Bill 2022 (CSLR) which was tabled in parliament last week.
Following the news, FSC's CEO, Blake Briggs, said the scheme — which aims to provide limited compensation where a determination issued by the Australian Financial Complaints Authority (AFCA) that relates to a financial product or service remains unpaid — is “rife with moral hazard that must be carefully managed”.
“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,” Mr Briggs explained.
“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.”
Mr Briggs said the government got particular features of the scheme correct, including a $150,000 cap on individual claims and a focus on financial advice failures, noting that some recent failures have increased the backdated costs of the scheme.
It's the FSC's view that costs could get out of control if the scheme is not appropriately targeted.
“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,” Mr Briggs said.
Meanwhile, the Financial Planning Association of Australia (FPA) also backed the Bill, with CEO Sarah Abood applauding the consumer protection offered by the scheme.
However, Ms Abood added that the association is concerned that the scope of the scheme doesn't ensure 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,” Ms Abood said.
“For example, most of the victims of the Sterling Group collapse would not be covered under the proposed scheme. This is also the case for most investors in the Mayfair 101 Group products. These products were often promoted directly to investors (using the wholesale/sophisticated investor exemption). These people have lost their life savings and in many cases are now completely dependent on the age pension.
“We're unsure at this stage what the findings will be in the case of the Dixon group. However, insofar as any consumer harms are a result of product failure, those investors would also not receive compensation from this scheme.”
Last month, the FPA called for the CSLR to be “urgently established” after ASIC urged former clients of Dixon Advisory & Superannuation Services (Dixon Advisory) — now in administration — to lodge complaints to AFCA as they may be eligible under the CSLR which at the time was not confirmed.
As she did then, Ms Abood again noted last week that currently there is $3.7 million in unpaid AFCA determinations relating to financial advice due to insolvency, while MIS operators have $6.4 million outstanding against them, which highlights the need for the CSLR to be expanded.
“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,” she said.
“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.”
As well as tabling the CSLR, Minister for Financial Services, Stephen Jones, confirmed that the government intended to wrap up the final legislation to implement the Hayne Royal Commission recommendations this year.
During his address to the Australian Institute of Superannuation Trustees (AIST), Mr Jones said this move was “long overdue”.