Government tables Compensation Scheme of Last Resort

AFA News 4 November 2021. On 28 October 2021, the Government tabled three Bills in the House of Representatives that make up the Compensation Scheme of Last Resort (CSLR) legislation. This follows the release in July 2021 of a proposal paper on the CSLR. The proposal paper has generated a lot of discussion in recent months, particularly with respect to its narrow scope and exclusion of Managed Investment Schemes. The scope of the scheme in the final Bill has remained narrow and is limited to personal financial advice to retail clients, securities dealing for retail clients, the provision of credit and mortgage broking. The final scope is actually reduced from the proposal paper, as it now excludes insurance distributors.  We expect that the scope of the scheme will be the subject of vigorous debate in the Senate.

Who will pay for the CSLR?

When the proposal paper was released back in July, we objected to the fact that financial advisers would end up paying more than three-quarters of the cost of the scheme. This included the establishment costs, the creation of a capital reserve, the annual compensation payments and the annual operating costs. The CSLR is proposed to commence from 1 July 2022, and the Government will meet the initial costs of the establishment and the first year of compensation payments and administration costs. A funding levy will commence from the second year (1 July 2023), and this will impact the financial advice sector.

Importantly, all current unpaid determinations for the in-scope services (including personal financial advice) that cover the period from the start of AFCA in November 2018, through until the commencement of the CSLR, will be paid for by a special levy on the 10 biggest banks and insurance companies.

If there is one thing that we can take some comfort from, it is that other entities will pick up the outstanding unpaid determination payments and the Government will cover the first year’s costs.

Please click here for a link to the media release from the Minister.

Please click here for a link to the main Bill and the Explanatory Memorandum.  Included within this Bill is another reform for the introduction of a Financial Accountability Regime.

We will keep a close eye on the progress of this legislation and keep members updated.

Issued 04.11.2021. AFA Policy & Education Update