Government releases Compensation Scheme of Last Resort proposal
AFA News 22 July 2021. On 16 July 2021, the Government issued a media release to announce progress on some of the remaining Banking Royal Commission recommendations, including the proposed Compensation Scheme of Last Resort.
The Government has released a proposal paper and draft legislation on the Compensation Scheme of Last Resort (CSLR). The CSLR is a scheme to meet the cost of unpaid AFCA determinations that arise as a result of a licensee being unable to pay or refusing to pay. The CSLR is something that the Government committed to prior to the Banking Royal Commission and re-committed to in response to the final report of the Banking Royal Commission. The AFA has previously agreed to the introduction of a CSLR, however that support was on the basis that it would be broadly based and that financial advisers would not be expected to pick up the cost of product failures. Unfortunately that is not the case.
The proposed scheme has the following features:
- The range of included products and services is very narrow, including financial advisers, credit providers, credit intermediaries, insurance distributors, and securities dealers. Some members will fit into multiple categories.
- Deposit products, Super funds and Managed Investment Schemes have been excluded.
- Financial advice will seemingly be expected to pick up three-quarters of the cost of this scheme.
- There will be a cap of $150,000 on individual payments.
- The annual administration costs of running the scheme are estimated to be at least $3.7m, which is on top of establishment costs ($6.3m) and the creation of a capital reserve fund ($5m).
- Unpaid determinations from the commencement of AFCA (November 2018) through to the start of the scheme, will be picked up by the 10 largest financial institutions.
- There will be a minimum levy threshold of $1,000, meaning that very small licensees will not be expected to pay.
We are very concerned about the cost of this new scheme and the potential risk in the event of a black swan product failure. There are a range of caps, and controls around secondary levies, however the overall annual cap is $250m.
Submissions should be provided to The Treasury and close on 13 August 2021. For any questions on the Compensation Scheme of last Resort, please email email@example.com
Issued 22.07.2021. AFA Policy & Education Update