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Compliance, Regulation

Compo scheme should be broad

financial services compensation scheme

All providers of financial services and products should contribute to an industry-wide consumer compensation scheme, the SMSF Association has recommended.

The SMSF Association has voiced its support for the establishment of a broad-coverage financial services compensation scheme of last resort (CSLR), with a focus on simplicity and equity.

In its submission to the federal government as part of the consultation process about the need for a CSLR, the association highlighted the importance of designing the compensation scheme to cover all financial services and product related activities requiring a financial firm to hold an Australian Financial Complaints Authority (AFCA) membership.

“A broad-coverage approach ensures that there is greater clarity and simplicity in determining if the service received is covered by the CSLR. In addition, a broader coverage also ensures that more consumers are protected,” the SMSF industry body said.

“Fundamentally, if you are an entity supplying a financial product/service, your consumers should have remit to the proposed compensation scheme.”

It also stated the scheme should be designed with simplicity in mind in order to increase understanding among stakeholders and lower the administrative costs associated with running the scheme.

“This desire for simplicity must be balanced with considerations of equity, ensuring that AFCA members are not excessively funding the CSLR when they are unlikely to have an unfunded compensation determination,” it added.

It listed several features for an equitable model of the scheme, including a split between administrative and claims costs, sectors assessed for risk based on claims costs and a single funding pool from which to pay compensation.

“Sector analysis is extremely important in the funding model to determine estimated contributions to the CSLR,” it noted.

“For simplicity, a single pool of money would then be used to pay compensation. A single pooled fund is likely to have a lower cost and reduced compliance burden than multiple pools.

“It would allow better predictability of costs based on a combination of known costs, projections and the cost of a market professional indemnity insurance policy.”

Last week, AFCA reaffirmed its support for a CSLR to protect consumers from losses from misconduct by financial services organisations.

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