Restricting any Compensation Scheme of Last Resort (CSLR) claims to cover capital losses only has been one of the more prominent suggestions to scale back the cost of the scheme on financial advisers.
Pat Conaghan, who took over the shadow financial services minister role following Luke Howarth failing to secure re-election in May, has now thrown his support behind the exclusion of the so-called “but for” claims from CSLR payments following the scheme’s operator releasing its submission to Treasury’s post-implementation review.
“The Coalition went to the last election with a clear plan to remove the ‘but for test’ – and the CSLR operator’s submission confirms exactly why,” Conaghan said.
“Ultimately, if the scheme is not sustainable then victims will receive nothing. Decisions like this are tough, but victims deserve a fair, functional and lasting scheme.”
In its submission to the review, the CSLR acknowledged that the Australian Financial Complaints Authority’s (AFCA) approach to calculating loss in financial advice complaints is “based on a widely accepted and agreed legal definition”.
“Relevantly for financial advice complaints that are within the CSLR’s scope, AFCA is required to determine ‘direct’ loss. This is an assessment of what position the consumer would have been in had the breach not occurred and appropriate advice been provided,” the submission said, adding that there are “circumstances where this position might be considered unsustainable”.
“We understand that there may be cases where the capital loss component represents the majority or entirety of the loss suffered by a claimant. Accordingly, several other measures and changes should be introduced to the legislative framework in conjunction with this to improve the sustainability of the scheme.
“It is important to clarify that this recommendation does not challenge how determinations are assessed or calculated by AFCA. Instead, it focuses on the specific component for which the CSLR provides compensation as a last resort.
“This ensures that the integrity of the determination process remains intact while addressing the financial sustainability of the CSLR. The CSLR recognises the basis of the ‘direct’ loss approach and the role it plays where determinations are made against solvent financial firms.”
Speaking on The ifa Show last month ahead of the submission’s release, CSLR chief executive David Berry said it recommended limiting the compensation to capital losses only.
“As a scheme of last resort, we also recognise we have limitations as to what we can pay in compensation. You know, $150,000 is an example of that. We think that there should be a recommendation that we’re paying compensation up to $150,000 for capital loss only,” Berry said.
According to Conaghan, the government has been “dragging its feet while victims wait”, given the delay in seeing any outcomes from the review that former minister Stephen Jones announced at the end of January and the subsequent special levy review that current Minister Daniel Mulino launched at the start of August.
“Without a timely decision, the CSLR will run out of funds – leaving thousands of victims unpaid,” the shadow minister said.
“The need for another special levy proves the scheme is fundamentally broken. But while Labor delay, there is a real risk that victims will go without. Every month of delay risks leaving families with nothing, while advisers are left with the possibility of unbearable costs on their industry for things that were simply out of their control.”
He also blamed the increasing cost pressures, including from the CSLR, for the “shrinking financial advice sector”.
“Advisers have already shouldered more than their fair share, but now they’re left with a sword hanging over their businesses while Labor ducks the hard decisions about funding,” Conaghan said.
“From the CSLR to the Quality of Advice Review, to the managed investment scheme review, Australians are frankly tired of endless reviews that never go anywhere – and in some cases are just completely buried,” Conaghan said.
He added: “We need a CSLR that is sustainable for victims, without putting an undue burden on sectors that had little ability to prevent collapses.”
During an ifa webinar in November, Berry revealed that about 80 per cent of claims that had ended up at the CSLR land in the ‘but for’ category.
“Let me just start by saying we can’t challenge the determination. So, whatever the determination amount is, that’s the loss,” Berry said.
“AFCA have a very defined way of determining what that loss is, and that includes, if they had have got good advice or appropriate advice at the time, what would their return have been?”
He added that for the 80 per cent that include what he termed a “hypothetical loss”, AFCA calculates whether, because of poor advice, the complainant “didn’t get the return that they would have had they got good advice”.
Since this point, many of the claims that have flowed through to the CSLR are not restricted to the “but for” category, with a large proportion clearing the $150,000 claim cap just on the back of capital losses.
Dodgy Dixon’s CSLR “but for claims” need to be the first stopped.
The whole bureaucratic Canberra self protection racket must be stopped.
Leading into the election Labor were against this too. Just fix it. Shambolic pontification is bleeding the advice profession dry.