On 28 October 2021, the Treasurer introduced a package of three Bills to establish and fund the Compensation Scheme of Last Resort (CSLR). The three Bills are:
Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 (the No. 3 Bill)
Financial Services Compensation Scheme of Last Resort Levy Bill 2021 (the Levy Bill)
Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021 (the Collection Bill).
There are divided opinions about the Government’s proposed CSLR. Some stakeholders, including the Opposition and consumer advocacy groups, have criticised the CSLR and argued that the proposed scheme ‘watered-down’ the recommendations of the Banking Royal Commission.
On the other hand, financial industry associations oppose the CSLR because they believe the scheme will add unnecessary red tape and cost to the industry.
What is the Compensation Scheme of Last Resort?
The CSLR is a proposed scheme that will provide compensation to eligible victims of financial misconduct who have not been paid, typically because the financial institution involved in the misconduct has become insolvent.
The CSLR arose from the Government’s commitment to implement Recommendation 7.1 of the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (known as the Banking Royal Commission or Hayne Royal Commission).
Who will be covered by the scheme?
As the name suggests, the CSLR will provide compensation to consumers as a last resort in specific circumstances—when the Australian Financial Complaints Authority (AFCA) has made a determination in favour of the consumer who experienced financial misconduct, and the financial institution in dispute has not paid in accordance with the AFCA determination (typically because of insolvency).
The proposed scheme is limited in its scope:
- the CSLR will only apply to unpaid AFCA determinations. Unpaid victims of financial misconduct as determined by court and tribunal rulings will not be covered by the CSLR
- the CSLR’s maximum compensation for each AFCA determination is capped at $150,000
- the CSLR will consider claims for unpaid AFCA determinations when the financial complaint is made to AFCA after 1 November 2018 (the date that AFCA commenced operations)
according to the policy proposal paper
released by the Treasury in July 2021, the CSLR will provide compensation to unpaid consumers who experienced financial misconduct in relation to five types of financial products and services (p. 7)
- the coverage of the CSLR has been reduced to four types of financial products and services in the No. 3 Bill; in other words, victims of financial misconduct outside the following four types of financial products and services will not be covered by the CSLR (proposed section 1065 of the Corporations Act 2001, at item 3 of Schedule 3 to the No. 3 Bill):
- personal advice on financial products to retail clients
- credit intermediation
- securities dealing
- credit provision.
How will the CSLR be funded?
The CSLR will be industry-funded. In other words, when victims of financial misconduct are unpaid due to a financial institution’s insolvency, it is up to the rest of the financial services industry to meet the shortfall via an annual levy to fund the CSLR.
Power to issue levy notices and collect levies
The Collection Bill will establish the power for the Australian Securities and Investments Commission (ASIC) to issue levy notices and collect levies from relevant financial firms for the purpose of funding the scheme.
The annual levy will be payable by entities that provide financial products and services which are within the scope of the CSLR (that is, those products and services which are authorised to be provided by Australian financial services licence and Australian credit licence holders who are required by legislation to be AFCA members). See above for the four types of financial products and services that are within the scope of the CSLR.
The annual levy that can be raised by the CSLR is subject to a cap of $250 million (clause 17 of the Levy Bill), possibly to avoid a cost blowout. The Government said:
The amount is considered high enough to fund claims for compensation in circumstances where there has been a large or ‘black swan’ event relating to a financial firm providing an in-scope financial product or service. Additionally, the amount is also considered low enough to support the sustainability of the scheme by limiting its potential yearly impact on leviable financial firms throughout the life of the scheme (p. 14).
The amount of levy that may be imposed in any particular subsector is capped at $10 million (clause 17 of the Levy Bill). However, the Minister may impose a special levy that exceeds this cap (proposed section 1069H of the Corporations Act 2001, at item 3 of Schedule 3 to the No. 3 Bill).
The levies payable by individual financial firms within each subsector will be scaled based on a prescribed metric. Generally speaking, the amount of levy a financial firm pays will reflect its size (that is, larger firms pay a higher levy).
According to the CSLR policy proposal paper released by the Treasury, the CSLR levy framework will align with the ASIC industry funding model/cost recovery framework to ease the regulatory burden on the industry (p. 13).
Where a levy, shortfall penalty or late payment penalty remains unpaid for a period of 12 months, ASIC may cancel or suspend a financial entity/person’s licence (item 8 of Schedule 3 to the No. 3 Bill). This decision is subject to administrative review (section 1317B of the Corporations Act 2001).
ASIC will also have the power to deregister a company if it does not pay the levies required under the CSLR, in conjunction with any associated costs, 12 months after the initial due date (item 6 of Schedule 3 to the No. 3 Bill).
One-off levy and special levy
In addition to the annual levy, a one-off levy will be imposed in the 2022-23 financial year. The one-off levy will be payable by the ten largest financial firms, excluding private health insurers and superannuation trustees (clause 10 of the Levy Bill).
As set out above, the Bills prescribe that the Minister (the Treasurer) can impose a special levy to respond to unexpected events or cost outlays.
The Bills provide power to make Regulations about the CSLR. For example, details of the levy calculations will be prescribed in the Regulations (clause 8 of the Levy Bill). At the time of writing, the Treasury has not released an Exposure Draft of the delegated legislation.
Position of major interest groups
Eight of the Australian financial industry associations have issued a joint media release to oppose the proposed CSLR, claiming that the scheme will add unnecessary red tape and increase costs to the financial advice sector. The eight financial industry associations said:
The draft legislation establishes a CSLR operator as a subsidiary of AFCA. This adds unnecessary red tape by requiring the ASIC to administer invoices and payments and significantly increases the Governments [sic] administration costs of the financial advice sector with little benefit to consumers. ASIC fees for financial advisers have increased by more than 230 per cent over the past three years. Most financial advisers are sole traders or small businesses who cannot afford the rising costs associated with increased regulation
Responsibility for consumer losses and complaints should be shared evenly across the sector. However, the proposed scheme does not apply to some industry participants, such as product manufacturers. [emphasis added]
The belief that the CSLR will increase costs to the financial advice sector is based on the argument that the scheme penalises good performers to fund the mistakes of bad performers (that is, imposing a levy on the industry to fund the mistakes of insolvent firms).
Nine consumer advocacy groups have made a joint submission to the Treasury expressing concerns regarding the limited scope of the proposed CSLR.
Broadly speaking, consumer advocacy groups welcome the Government’s commitment to establish a CSLR. However, they recommend the Government expand the scope of CSLR. Specifically, they believe a CSLR should:
- cover victims of financial misconduct as determined by court and tribunal rulings
- cover more financial products and services (covering, for example, victims of financial misconduct in relation to funeral expenses policies, managed investment schemes and debt management firms)
- increase the proposed individual payment compensation cap of $150,000 because ‘this cap is too low for some people who have suffered losses from financial advice scandals’
- have more options available in the event of a funding shortfall and
- the Minister should have the power, by Regulations, to increase the annual scheme cap above $250 million.
This FlagPost was amended on 30 November to remove an incorrect reference to coverage of the CSLR.