The Financial Services Council (FSC) has urged the government to address regulatory issues that lead to advice licensees being unable to meet compensation obligations before it introduces the compensation scheme of last resort (CSLR).
The CSLR was a recommendation from the royal commission, which had pushed for a way for consumers to be compensated when they had experienced misconduct and lost out to a financial firm that was no longer able to pay.
In its submission to the government’s CSLR consultation, the FSC has recommended a targeted “mid-coverage” scheme, including the sectors which have historically had unpaid determinations – pointing to financial advice, investments and credit.
It has also called for sector specific funding, where each sector responsible for unpaid amounts solely funds the losses in its sector.
The FSC wants scheme caps, without any cross-subsidisation across sectors to fund losses.
But if the government does decide to go with a cross-subsidised CSLR, the FSC has said it should apply to a broader general levy funded by all Australian Financial Complaints Authority (AFCA) members, for a “General Levy Resilience Reserve”.
FSC chief executive Sally Loane said the government needs to address regulatory weakness, such as advice licensees being unable to meet their compensation obligations, calling it the most important step towards protecting consumers.
“With most of the historical unpaid determinations arising from poorly capitalised financial advice businesses, we want to see the introduction of adequate capital requirements and greater oversight of appropriate and strong professional indemnity (PI) insurance requirements for financial advice licensees,” she said.
“The introduction of a CSLR without strengthening the regulatory weaknesses in advice will result in an incredibly costly shortcut which won’t address the underlying issues leading to financial advice licensees failing to meet their consumer compensation obligations.”
She said her body has long had concerns around the “risk of moral hazard” from the scheme and wants to ensure it is “targeted, sustainable and equitable”.
“This means capping claims at reasonable levels, ensuring sectors which are responsible for the losses self-fund those losses and implementing a scheme without cross-subsidisation across financial services sectors,” Ms Loane said.
Further, the FSC has recommended unpaid determination data should be collected from the outset to enable the CSLR to move to a financial services provider risk-based funding approach as soon as reasonably practical.
Ms Loane added that Australia should look to overseas examples to avoid failure.
“We know the UK has a very big compensation scheme, which cost more than a billion Australian dollars last year,” she said.
“We must learn from the UK experience and address our regulatory weaknesses upfront otherwise we will have a scheme that will blow out in size and cost.”
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