CSLR exclusion ignores recommendations

CSLR MIS exclusion

Excluding managed investment schemes from the compensation scheme of last resort ignores recommendations from the Hayne royal commission.

The exclusion of managed investment schemes (MIS) from a compensation scheme of last resort (CSLR) should be reconsidered on the back of the impact the failure of such investment vehicles has had on investors, including SMSFs, according to the SMSF Association (SMSFA).

SMSFA chief executive John Maroney said the association supported measures to improve consumer protections and welcomed the proposed CSLR, but the exclusion of MISs from the scheme was a concern and ran counter to recommendations from the financial services royal commission.

“Historically, these failed schemes have had an enormous financial impact on those consumers caught up in them, including SMSFs,” Maroney said.

He noted a Senate inquiry in late 2021 revealed the economic impact on investors in the failed Sterling Income Trust scheme and said “most of the victims were elderly Australians yet under this proposed compensation scheme they will be excluded”.

“In the same way it will exclude consumers from First Nations communities who lost thousands of dollars invested in funeral insurance policies after the collapse of the Aboriginal Community Benefit Fund,” he said.

“Further back, the collapse of Trio Capital in 2009 saw a Parliamentary Joint Committee inquiry held to examine it as well as other related matters. With all the issues the common thread was a lack of consumer protections that were highlighted by our association and other organisations.”

He said that in regards to Trio Capital, which was a responsible entity for 28 MISs, a number of superannuation funds were negatively impacted and left without recourse under the proposed CSLR.

“Exposure to fraud resulted in significant losses for direct investors and superannuation funds,” he said.

“The superannuation funds involved included both large Australian Prudential Regulation Authority-regulated funds and SMSFs. In total, 415 direct investors and 285 SMSFs had no access to compensation.”

He said the establishment of a wide-ranging CSLR was a key recommendation of the financial services royal commission, “but the compensation scheme outlined in these four pieces of legislation does not incorporate the spirit or intent of the royal commission’s recommendation”.

“As such, [it] is failing the ordinary Australians who fall victim to failed MIS. We urge the government to revisit the legislation with the aim to expand its scope so that MIS victims are included,” he said.

The Financial Planning Association has also questioned why MISs, which are subject to complaints to the Australian Financial Complaints Authority, are not covered by the CSLR, adding the government, while in opposition, supported the inclusion of MISs under the compensation scheme.

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