Not long ago, the Morrison Government released draft legislation outlining plans to establish the Compensation Scheme of Last Resort (CSLR) as recommended in the final Royal Commission report.
How it works
In a joint statement, Treasurer Josh Frydenberg and Senator Jane Hume said the CSLR would “support ongoing confidence in the financial system’s dispute resolution framework” by providing a means for consumers to receive compensation in situations where a determination by AFCA remains unpaid. The list of products and services eligible for CSLR consideration comprises personal advice on relevant financial products, credit intermediation, securities dealing, credit provision and insurance product distribution.
For someone to claim compensation from the CSLR, the matter must be within the scope of the above list and AFCA has to have been notified of non-payment following a determination within 12 months. Additionally, AFCA will need to have taken “reasonable steps” to pursue payment (contacting the relevant entity for an explanation, discussing a payment plan and so on) and found that the member is unable to pay. Finally, there must not be any other statutory compensation scheme available to resolve the issue.
Should a claim meet all of the above criteria, the CSLR will make a payment in line with AFCA’s original determination (which can’t be reassessed in this framework) up to a maximum amount of $150,000.
That compensation cap, according to Labor MP Stephen Jones, is not nearly enough. In a statement, Jones described the Government’s proposed CSLR as being “four years late” and noted that the cap was substantially below the $550,000 recommended by the Royal Commission. He added that the delay between the commissioning of the Ramsay Review into financial services dispute resolution and the “buried” release of this draft legislation amounted to “four years of limbo for victims of financial collapses and rip-offs” and “four years of uncertainty for the industry”.
Cost to advisers
Whatever certainty this draft legislation provides, it’s unlikely to elicit much comfort for the advice industry – already on the hook for another increased ASIC levy in 2022. And that’s because under the proposed funding model for the CSLR, the advice sector will be billed an estimated $12.3 million in the first year and $7.5 million for the next two years. This breaks down to a levy of $544 per adviser in year one and $341 per adviser in years two and three.
On an ongoing basis, the advice sector will pay around $6.2 million in annual levies ($291 per adviser), substantially above the amounts leviable for other products and services included in the scheme.
Copying the past
In order to streamline the CSLR’s establishment process, the funding model has essentially been designed to mirror the existing one used by ASIC – that is, it will “adopt the same subsector definitions and use data collected by [ASIC]”. This is likely concerning for those parts of the industry who have questioned the ASIC funding model’s ability to – as LNP MP Bert van Manen put it in a parliamentary joint committee earlier this year – “ensure that the parts of the industry incurring these large costs actually bear the commensurate responsibility to pay the levy, and that those small businesses in the industry who are not responsible actually pay the levy at a reasonable rate.”
Moreover, because certain financial products (such as managed investment schemes) are excluded from the scope of claims the CSLR can consider – despite, it’s worth noting, being within AFCA’s broad remit – the advice industry is effectively culpable (and leviable) for both the conduct of its representatives and the integrity of the products those representatives recommend. In other words, it’s not fund managers who will be paying into this compensation pool each year – even if their products fail.
If you’d like to provide feedback on the Government’s proposed CSLR funding model, now’s the time. The draft legislation was accompanied by an ASIC report into the industry’s transition away from grandfathered commissions, which we’ll delve into next week. In the interim, please help us understand the impact of the Life Insurance Framework on your business via this survey.
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