The federal government will move ahead with plans to introduce a compensation scheme of last resort (CSLR) for the financial services sector that, once established, will cost advisers around $300 a year.
The CSLR was announced by Treasurer Josh Frydenberg and Superannuation, Financial Services and the Digital Economy Minister Jane Hume, who said the scheme “will support ongoing confidence in the financial system’s dispute resolution framework by facilitating the payment of compensation to eligible consumers who have received a determination for compensation from the Australian Financial Complaints Authority (AFCA) which remains unpaid”.
As part of the announcement, the government released draft legislation that includes details of the eligibility requirements for compensation, the level of payments available and the levy framework to fund the scheme.
A proposal paper available with the draft legislation indicates the financial advice sector will be included in the compensation scheme and in its first year of operation will be charged $12.2 million in levies, and that every firm with more than two advisers will be required to pay a levy of $544 per adviser.
These figures would reduce in the second and third years to $7.4 million for the advice sector and $341 per adviser, while the threshold of advisers per firm would increase to three or more.
From the fourth year onwards of the operation of the scheme the sector cost would be $6.1 million with a $291 levy per adviser charged to firms with four advisers or more.
The explanatory memorandum (EM) to the legislation stated the levies would be used for compensation payments, which will be capped at $150,000, but also to pay the operational costs of the scheme.
“The levy will cover amounts that the CSLR operator believes will be payable to applicants under the compensation scheme and to AFCA as unpaid complaints handling fees, as well as amounts to build a capital reserve, to cover the CSLR operator’s expected establishment and administrative costs and ASIC’s (Australian Securities and Investments Commission) administrative costs. Other levy components will collect amounts to cover relevant unpaid claims and AFCA fee amounts accumulated since 1 November 2018,” the EM said.
It also noted levies for the scheme would be capped at $250 million across the financial product and services sectors and a sub-sector cap of $10 million would also apply, and no further levies will be collected in any period once these caps have been reached.
The government, via Treasury, is seeking feedback on the scheme and consultations will close on 13 August.
