The Compensation Scheme of Last Resort (CSLR) has removed the incentive to commence legal action against financial advice firms and practitioners who have acted dishonestly and left clients out of pocket, the Financial Advice Association Australia (FAAA) has claimed.
FAAA chief executive Sarah Abood made the observation during an online discussion with CSLR chief executive David Berry and Australian Financial Complaints Authority (AFCA) lead ombudsmen for investments and advice Shail Singh in regards to claims made against insolvent firms.
Berry noted where a firm was in administration, it was unlikely it would make any compensation payments as outlined in an AFCA determination against it, prompting Abood to ask whether the CSLR could seek recompense from the administrators.
“Do you have standing where can you say to the administrators: ‘We are a creditor because we are paying these consumer claims’?” she said.
Berry said while the CSLR could not commence legal action, it did have subrogation rights under which it can step in after paying a claim to obtain funds from a firm up to the level of those in the compensation payment.
“That sounds simple, but it requires a couple of things. It requires the organisation to recognise the [AFCA] determination and compensation payment as a debt owed by it,” he added.
“If the determination has been given before it goes into administration, then we’ve got stronger grounds to get proceeds from any liquidation of the organisation.
“If the organisation has gone into administration and the determination is issued after that, it’s up to the administrator to say whether they accept that as a creditor or not.
“Accepting it as a debt is at the discretion of the administrator or the liquidator.
“There’s nothing to incentivise an administrator or liquidator to accept additional claims.”
Abood noted the limited application of the subrogation rights and the ability for administrators to reject a CSLR claim diminished the appeal of legal action and elevated the role of the CSLR.
“This is one of our many advocacy points and our concern is now that the CSLR is in place there is very little incentive for any other party to take action against a bankrupt entity because the CSLR is a risk-free recovery mechanism for clients, at least up to $150,000,” she said.
“If anyone wants to recover that by the courts, there are costs involved, there is the risk that you will lose. You have got to pay lawyers, there’s extensive time and delays and so on.
“So our concern is that there will be less action taken against firms that go into liquidation as a result of the CSLR and we have a live case now with Dixon’s where there was a class action that was commenced before the CSLR [began].
“Why would anyone go to court where they have almost a guarantee, as long as their claim is supported by AFCA, of getting up to $150,000 from the CSLR?”
