Following the passage of the Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023 through the Senate last week, Financial Services Minister Stephen Jones said this marked the implementation of one of the last outstanding recommendations from the Hayne royal commission.
“This is a significant victory for over 2,000 people who have been waiting for a resolution on their cases,” said Mr Jones.
The CSLR is meant to facilitate compensation of up to $150,000 to consumers who have an unpaid determination from the Australian Financial Complaints Authority (AFCA) relating to personal financial advice, credit intermediation, securities dealing and/or credit provision.
“To ensure the CSLR can commence as soon as possible, the government will fund the costs to establish the body that will operate the CSLR, including funding the costs of the first levy period through to the end of the 2023–24 financial year. The scheme will then be funded by industry for future years,” the minister said.
In response to the announcement, FAAA chief executive Sarah Abood said the association has some reservations about the effectiveness of the scheme.
“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,” Ms Abood said.
“However, the legislation has not changed substantially from previous drafts and many of the concerns we expressed previously remain.”
She 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).
“A major source of consumer harm in our sector is MIS failure, and this isn’t covered in this legislation,” Ms Abood said.
“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.”
While Ms Abood acknowledged that advisers will not be required to bear the costs of the set-up costs and first year of operation, she raised concerns over the ongoing costs to advisers.
“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,” Ms Abood said.
“That said, we do 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).
“We really will need to keep any eye on those running costs and ensure they are reasonable.”
FAAA also applauded changes to disincentivise companies from resorting to the scheme but suggested further changes to support advisers.
“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,” Ms Abood said.
“We will continue to work with the government, advisers, consumers, and other stakeholders to help ensure the scheme can operate effectively and promote consumers’ trust in financial advice.”
