Not long ago, we discussed the Senate committee inquiry into the proposed structure of (and levy for) the Compensation Scheme of Last Resort.
This inquiry, now completed, was of particular relevance to advisers because of the CSLR's funding model – which would see the advice industry on the hook for the majority of the scheme's costs. This is partially because the levy framework is based on the same one used by ASIC but also due to the CSLR's current scope; unlike AFCA, the CSLR doesn't include managed investment schemes.
During the inquiry, multiple industry bodies (including the AFA, the FPA and CPA Australia) criticised the Government's decision to exclude these products from the CSLR. The committee's report acknowledges these concerns but ultimately argues that "the scheme, broader than initially envisaged by both the Ramsay Review and the Royal Commission, is based on prior extensive evidence ... which concluded that a targeted and scalable scheme covering financial advice was the most appropriate response."
The report continues: "The committee believes that the proposed compensation cap and levy will ensure the long-term sustainability of the scheme. Importantly, that it correctly balances the liabilities for industry, the provision of just compensation to claimants from scheme contributors and, restoring consumer confidence in the financial services sector as a whole."
These findings probably aren't encouraging for those advisers who, like AFA CEO Phil Anderson, are concerned that they will end up "paying for unpaid determinations from other [industry] sectors." But it's worth noting the committee's view on the CSLR's scope and levy framework wasn't unanimous.
In an addendum to the report, Labor Senators Anthony Chisholm and Jess Walsh expressed their concerns regarding the "narrow focus of the proposed compensation scheme and the decision by the Government to exclude managed investment schemes from coverage."
Referencing the recent Senate committee inquiry into the Sterling collapse, which found that Sterling victims "are unlikely to be assisted by the CSLR," the Senators recommended that the CSLR be expanded accordingly.
Liberal Senator Andrew Bragg offered an opposing view, arguing that expanding the CSLR would compromise its purpose as a "missing link ... target squarely at addressing the plight of consumers who have been unable to secure compensation."
"It is imperative that the CSLR not extend to managed investment schemes," Bragg continued. "Participation in [MISs] can, depending on the type, come with significant downside risks. To push these risks onto the wider sector would extend the exposure to risk to the wider financial sector, while insulating the responsible parties from accountability.
"De-risking investment activity would have a distortionary effect on financial markets, undermining the integrity of the financial system as a whole."
Bragg's argument echoes earlier comments from Senator Jane Hume, who said that the CSLR shouldn't exist to compensate "people who punt their savings on emu farms and tulips." While it's inarguable that any investment carries a certain amount of risk, who's going to ultimately be held responsible in the event of a product failure with significant client impact?
Well, we know who.
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