Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.
The FPA is part of a consortium of consumer groups and professional associations joining together to advocate for changes to proposed Compensation Scheme of Last Resort (CSLR) legislation. We are of the view that the current scope doesn’t go far enough to protect consumers.
As one of many recommendations from the Hayne Royal Commission, a Compensation Scheme of Last Resort (CSLR) is intended to protect consumers from the penalties of misconduct in the financial services industry. However, the proposed legislation to introduce the CSLR as a process carried out by the Australian Financial Complaints Authority (AFCA) has limitations when it comes to covering losses in relation to all financial products and services. The FPA also has concerns that the levy financial planners will be expected to pay to fund the CSLR is unfairly weighted towards the financial advice profession.
Broader scope to protect consumers
The objection to the proposed scheme that has united the consortium of 15 groups is simple. They all agree that the scheme does not go far enough to protect consumers and recommend that the legislation be broadened out to provide compensation for all financial products and services AFCA is responsible for.
“The Government’s draft bill will exclude vast segments of the financial industry, including managed investment schemes and the funeral expenses industry, leaving many victims of financial misconduct without redress,” the group stated in a press release. “It will also mean that a number of large financial institutions including product providers are not required to contribute to the costs of compensation.”
As the legislation stands, AFCA would not be able to use the scheme to make payment to consumers affected by misconduct by managed investment schemes, for example, even when a determination is made in favour of the complainant. The Sterling First Group collapse is a good example of a situation where the proposed CSLR would fail to provide payment to victims of fraud and misconduct by a financial services provider.
How complaints have changed
This limited scope puts Australians at risk of missing out on compensation when the party at fault is unable or unwilling to pay. It also limits the providers who will the shoulder the cost burden of the scheme. In recent times, financial planning businesses have taken on additional compliance costs in many forms – from the additional resources needed to meet documentation and reporting requirements to increases in the ASIC levy. Although the levy has now been frozen, the new cost of the CSLR represents another unknown and mandatory fee financial planners will be expected to pay. These increasing business costs put the viability of their practices at risk as well as the affordability of advice for everyday Australians.
Before the Hayne Royal Commission included a CSLR in its recommendations, the Ramsay Review of Australia’s external dispute resolution scheme conducted in 2017 had found that a compensation scheme for victims of financial misconduct was necessary. At that time, it was reported that over 90% of unpaid Financial Ombudsman Service determinations were from financial advice.
Since then the profession has undergone significant reform and there has been a sharp fall in the number of complaints about financial advice to AFCA. In the year to 30 June 2021, only 1.8 per cent of complaints came from the advice profession and less than a third of those complaints (28%) were upheld. In spite of being responsible for a fraction of complaints in recent times, the financial advice sector is expected to foot a large portion of the bill for the proposed CSLR.
Overhauling compensation across the board
As the name suggests the CSLR has to be designed in a manner that ensures it is a last resort solution for compensation. AFCA, as the sole determinant of payment awards from the scheme should be required to demonstrate they have pursued all reasonable avenues to secure compensation from the party at fault. This is why it’s so important to ensure that professional indemnity insurance requirements and provision is adequate across the whole financial services industry.
The FPA welcomes the Government announcement that they will be conducting a review into the effectiveness of professional indemnity insurance. As long ago as 2012, the St John review indicated this review was needed. With improvements to standards in professional indemnity insurance and monitoring of compliance with insurance requirements, we can expect there to be less need for consumers and AFCA to rely on the CSLR for payment of compensation.
Strength in numbers
As one of a package of four bills introduced into the lower house in Parliament in October, the Financial Services Compensation Scheme of Last Resort Levy Bill 2021 may not be resolved until Parliament resumes in 2022. In the meantime, the FPA and other consortium members including the AFA, the Institute of Public Accountants, CA ANZ, Financial Counselling Australia and consumer representative bodies CHOICE and Super Consumers Australia will continue to advocate for CSLR legislation that true to the recommendations of the Hayne Royal Commission. It’s important that industry and consumer advocacy groups can come together to pressure the Government on issues that can have detrimental impact on consumer rights and protections.
To add your voice to the campaign for changes to the CSLR, you can reach out to MPs and Senators. Our new advocacy kit provides you with all the information and tools you need to get the word out.