The “long-promised safety net” of a compensation scheme of last resort (CSLR) cannot be delayed any longer as COVID-19 amplifies financial losses.
The need for a CSLR was endorsed by Recommendation 7.1 of the royal commission final report. Now the Australian Lawyers Alliance (ALA) said the government must move quickly on implementing the CSLR.
“The government must move to implement this scheme as soon as possible,” said ALA spokesman and solicitor Josh Mennen.
“Because the proposed scheme is forward-looking, every day that it is delayed is another day of financial losses that wronged consumers may never be able to recover … The government committed to introducing legislation to enable this scheme by the end of this year after a number of horror stories were graphically exposed through commissioner [Kenneth] Hayne’s public hearings.”
A CSLR “would aim to compensate people who have been victims of misconduct and lost out through no fault of their own at the hands of financial services providers” – even if the firm is insolvent.
While the Australian Financial Complaints Authority (AFCA) has established systems to assist some consumers who are entitled to receive compensation as a result of previous wrongdoing, Mr Mennen said it does little to help consumers suffering through the current crisis as a result of bad advice.
“Financial advisers have long been incentivised through grandfathered commission structures and asset-based fees to invest their client’s funds into higher risk portfolios than is appropriate for their risk tolerance,” Mr Mennen said.
“This inappropriate financial advice often goes unnoticed until an economic crash and hundreds of individuals and families will now be reeling from the impact of losses incurred as a result of the current economic crisis.”
Both AFCA and the Financial Services Council (FSC) have endorsed the need for a CSLR, although the FSC wants to see strengthening of professional indemnity (PI) insurance requirements for financial advice licensees alongside any scheme.
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