The federal government will establish a compensation scheme of last resort (CSLR) from early next year after legislation enabling its creation passed through parliament, but questions have been raised about its cost and gaps in its coverage.
Financial Services Minister Stephen Jones said the CSLR would be able to receive claims for compensation from consumers from April 2024 after the Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023 passed through the Senate last Friday.
“This is a significant victory for over 2000 people who have been waiting for a resolution on their cases,” Jones said, adding the creation of the CSLR was a recommendation from the Hayne royal commission.
“The CSLR will facilitate compensation of up to $150,000 to consumers who have an unpaid determination from the Australian Financial Complaints Authority relating to personal financial advice, credit intermediation, securities dealing and/or credit provision.”
He said the government would fund the costs to establish the body that will operate the CSLR and also provide funding for the costs of the first levy period, which would run to the end of the 2024 financial year, after which its operation would be paid for by the financial services industry.
The Financial Advice Association Australia (FAAA) said the establishment of the scheme was welcome, but it still did not cover managed investment schemes (MIS) and the funding model to be applied to the advice sector was still unclear.
FAAA chief executive Sarah Abood said the finalised legislation had few changes from previous draft legislation and did not address industry concerns.
“A major source of consumer harm in our sector is MIS failure and this isn’t covered in this legislation,” Abood said.
“We acknowledge that a review into the regulatory structure of MISs has been announced, and this is a positive step. However, this could take some time, while consumers remain unprotected from failures in this area.
“It’s important to acknowledge that advisers will not be bearing the set-up costs and those in the first year of operation. We must ensure that all previous cases are fully dealt with in the first year to ensure that current advisers are not being asked to pay for failures caused by those no longer in our sector.
“That said, we do have concerns that the running costs of the scheme after the first year may be onerous for advisers.”
There are estimates as high as $1250 per adviser if the sector cap of $20 million were to be reached, with an expected amount closer to $375 per adviser if running costs are closer to the estimate of around $6 million a year.
“We really will need to keep any eye on those running costs and ensure they are reasonable,” Abood said.
