The Government reintroduced the Compensation Scheme of Last Resort (CSLR) legislation into the House of Representatives on the evening of 8 March 2023. This replaced an earlier Bill that had already been passed in the House of Representatives and introduced into the Senate without being debated. This time the Bill, is focussed only on the issue of the CSLR and has been separated from the other measure that it was previously associated with – the Financial Accountability Regime. A Senate Economics Committee reviewed the previous legislation with the majority report committing to passing the legislation as is, although the Coalition Senators expressed some concerns. This legislation is virtually the same as the previous legislation that was introduced on 8 September 2022 and the legislation tabled by the previous Government in 2021 with a primary focus on Financial Advice and without the inclusion of Managed Investment Schemes (MISs).
The Bill sets out that the cost of unpaid determinations from the commencement of AFCA in November 2018 until 7 September 2022 will be paid for by the 10 largest financial institutions in Australia, whilst the costs of the first year of the scheme will be picked up by the Government. Financial Advisers can expect to start picking up a share of these costs from 1 July 2024.
The debate in the Parliament on the CSLR needs to take into account the risk of a black swan event, that could result in large losses. AFCA have received something in the order of 1,800 complaints since last year related to the firm Dixon Advisory, which is now in voluntary administration. These complaints came after direct communication and a media release from ASIC in early August 2022, which included encouragement to complain to AFCA. Seemingly the primary reason for these complaints is losses that these clients have suffered from a substantial decline in the value of a related party US property investment. There are some suggestions that this could be in the order of hundreds of millions of dollars, however this cost, to the extent that it related to the period up to 7 September 2022 will be paid for by the largest 10 financial institutions. The Dixon Advisory matter highlights the risk of black swan events, that if they arise in the future, could be charged to financial advisers. The legislation includes a $20m cap for each sector, however the Minister can authorise levies above this level. A cost of $20m a year would amount to around $1,250 per adviser.
We will closely monitor the progress of this Bill in the parliament and keep members informed of any major developments.
Please provide any feedback on the CSLR reforms to policy@afa.asn.au.
