Introduction
2.1
This chapter examines the views held by stakeholders on the provisions of the Financial Accountability Regime Bill 2021 (FAR bill), Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 (HRCR bill), Financial Services Compensation Scheme of Last Resort Levy Bill 2021 (CSLR bill), and Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021 (Collection bill). It is based on the bills' explanatory materials and submissions received by this inquiry, including a public hearing in Canberra on 27 January 2022, and additional material submitted to the Senate Economics Legislation Committee (the committee).
2.2
Following a call for submissions, the committee received 33 submissions from interested parties. Submissions showed widespread support for the bills in a modified form.
2.3
This chapter provides an indicative, although not exhaustive, account of the key issues relating to the package of four bills. It concludes with the committee's views and recommendations on the bills. The discussion is separated into the key high-level reforms in relation to the establishment of a Financial Accountability Regime (FAR) and a Compensation Scheme of Last Resort (CSLR).
Financial Accountability Regime
Overall support for the bills
2.4
The majority of submissions to the inquiry supported the bills and their intent to establish a FAR to improve the operating culture of entities in the banking, insurance and superannuation industries and to increase transparency and accountability, both in relation to prudential and conduct related matters.
2.5
Many of the submitters noted that that the proposed bills implement recommendations of the Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Industry (Royal Commission) relating to the extension of the Banking Executive Accountability Regime (BEAR) to other Australian Prudential Regulatory Authority (APRA)-regulated industries and to have APRA and the Australian Securities and Investments Commission (ASIC) jointly administer the extended regime.
2.6
The Business Council of Australia (BCA) commented:
Subject to our comments on proposed amendments to the bills, the BCA strongly supports the package of bills and encourages the Senate to pass them as quickly as possible following the conclusion of the committee's inquiry.
2.7
The Australian Institute of Company Directors (AICD) expressed its support for the establishment of the FAR to improve the risk and governance cultures of Australian's financial institutions:
The AICD supports measures to strengthen governance and accountability practices across financial services industries, including implementing the recommendations of the Royal Commission.
…
The AICD supports passage of the bill in its current form. While the AICD does retain some concerns with certain elements of the bill, we consider that on balance the FAR will result in accountability improvements across all APRA-regulated entities.
2.8
The Australian Banking Association (ABA) stated that the bill covers matters of considerable significance for the financial sector and its customers and welcomes the key provisions in the bill to strengthen accountability and transparency in the financial system.
2.9
APRA articulated that, given the positive outcomes from the BEAR, it supported recommendations from the Royal Commission to broaden the regime to all APRA-regulated industries.
Concerns with the reforms
2.10
Several inquiry participants from a cross-section of the financial services sector raised concerns with the Government's proposed reforms in relation to the establishment of the FAR. Key issues are discussed below.
Design of the regime
2.11
A couple of submitters questioned the Government's rationale for establishing a new regime under the FAR as opposed to extending the existing one under the BEAR. The basis for this argument being that, in a practical sense, authorised deposit-taking institutions (ADI) now understand the regime and how to apply it, and the introduction of a new regime would therefore impose additional burdens on industry.
2.12
For example, the Law Council of Australia submitted:
The BEAR should be extended in its existing form to the other types of entities which are regulated by the APRA rather than replaced with the FAR.
While similar to BEAR, the FAR imposes differing, and additional obligations compared to the BEAR. This means that efficiency benefits which would arise from simply extending BEAR are not available… If the BEAR is seen as having any shortcomings, it would be open, and more efficient, to make incremental changes to that regime, rather than replace it with the completely new FAR.
2.13
Similarly, whilst supporting the establishment of a new regime, the ABA submitted:
The ABA has supported the introduction of the BEAR and supports consolidation and extension regime into the FAR by means of the FAR bill.
The ABA has consistently taken the view that the FAR should build on the key strengths of the existing BEAR regime rather than replace it.
2.14
Notwithstanding the above concern, the committee received evidence articulating the rationale for the design and establishment of the FAR, and positive aspects of the proposed new regime.
2.15
In its submission to the committee, APRA submitted:
The design of the FAR has taken into account feedback from industry that has led to some changes relative to the BEAR that should reduce regulatory burden for industry while retaining the core goal of improving accountability.
Given the positive outcomes from the BEAR, APRA supported recommendations from the Royal Commission to broaden the regime to all APRA-related entities. This will extend coverage of an accountability regime from around 143 ADIs under the BEAR to approximately 435 entities under the FAR. APRA would expect to see similar benefits in the insurance and superannuation industries to those identified in the previous section on the BEAR.
2.16
Further, the Department of the Treasury (Treasury) clarified the reasons why it is necessary to implement the FAR rather than extend the BEAR. The following dialogue from the public hearing addresses the concerns raised above, and extrapolates the complexities of extending the BEAR:
CHAIR: One of the issues that was raised by the Law Council of Australia was the question: instead of introducing the FAR, why don't we just extend the BEAR to cover more areas and more financial services institutions? The argument is that the BEAR has been bedded down by ADIs. They know what it means and they know how to apply it. So wouldn't it be easier to stay with what we know and just extend that to more institutions? What's your answer to that proposal?
Ms Zaheed: The Banking Act applies to banks and ADI's. It does not apply to insurers, it does not apply to superannuation trustees, and it's also not administered by ASIC. From a Treasury perspective, one of the things we try to aim for … is to have laws that are accessible and, where possible, contained in one spot so entities engaging with the law have a chance to understand what the law says.
In terms of the approach that's been taken—it's been designed, obviously, with the Office of the Parliamentary Counsel … the Banking Act simply does not apply to the other sectors, and it would be incredibly messy to try and replicate it. You'd have pretty much the same provisions in four different acts. Then you'd have to think about how to give ASIC powers to administer the right parts of the acts. Any changes parliament wants to make to the acts would then mean you are changing four different bits of acts. If there is a transcription error, the law falls out of alignment. So, in terms of extending the BEAR, it has been necessary—from a law design perspective of having laws that are accessible and futureproof.
One of the key principles that we have adopted as we've gone through is consistency with the BEAR. Changes that have been made to the legislation between the BEAR and the FAR reflect changes that are necessary to reflect the changes in policy, but, to reduce the cost to industry and reduce that implementation burden, we've sought to avoid unnecessary changes … As a slightly different view to the Law Council's in terms of the legal complexities that would arise, it may be simpler for those banks that have complied, but for everyone else and the future of that legislation it would be really complex to maintain.
Scope of the regime
2.17
Consumer groups who responded to the inquiry drew the committee's attention to their concern that the FAR should be expanded to include executives and senior managers within the scope of the regime to improve culture and strengthen accountability within the financial services sector. For example, Choice argued:
While executives must be accountable for corporate decisions, senior managers regularly make operational decisions that affect their customers. Senior managers should be held to account. The United Kingdom's Senior Managers Regime, on which the Australian model was originally based, covers executives and senior managers. This will help promote lasting cultural change within financial services firms.
2.18
However, Ms Christine Cupitt from the ABA disagreed with this perspective and in her verbal evidence to the committee, clarified the rationale for the scope of proposed regime:
Our view is that the accountability should be concentrated with the most senior executives. That is consistent with the intention of the BEAR and now with the FAR, which is to be able to readily identify who's responsible. If you start to create a more diffuse set of accountable people, there's the risk that, if everyone's accountable, no-one's accountable. That's exactly what the FAR is trying to avoid.
Uncertainty and unintended consequences
2.19
A number of stakeholders raised concerns that the proposed bills, if enacted in their present form, would create a considerable amount of uncertainty and may have unintended consequences for related entities that are not within the policy intent of the draft legislation.
2.20
The BCA articulated their concerns as follows:
The stated purpose of the FAR bill is to apply such obligations to financial entities in the banking, insurance and superannuation industries. These obligations are appropriate for those entities and have been designed with them in mind. However, the FAR goes further than necessary by also extending these obligations to 'significant related entities' of accountable entities, and to the accountable persons of those entities.
…
The bill as currently drafted will extend the FAR to businesses in a wider range of industries beyond the financial services sector, simply by virtue of them having their own corporate superannuation fund. This was never the intent of the FAR reforms.
2.21
Similarly, the Association of Superannuation Funds of Australia (ASFA) stated:
We are concerned that the definition of 'significant related entities' may be too broad and may inadvertently capture parent companies, even when they are not [Australian Financial Service Licence] AFSL-regulated by APRA or ASIC. In the absence of a carve-out, the FAR may potentially apply to the telecommunications industry and the aviation industry, which we don't consider to be within the policy intent of the draft legislation.
2.22
This view is also shared by a number of stakeholders including Telstra Super Pty Ltd (Telstra Super) and the Financial Services Council (FSC) both of whom argue that clarification regarding the definition of 'significant related entities' of accountable entities is required. Telstra Super stated:
We are concerned that the current draft legislative provisions may give rise to a potential interpretation that Telstra may be a significant related entity of the Trustee [Telstra Super] … [and] could potentially give rise to Telstra becoming subject to the FAR. We feel that this is an unintended consequence of the Bill and is not within its intended scope.
2.23
King & Wood Mallesons argued that a 'significant related entity' (and certain accountable persons associated with that entity) will indirectly be required to comply with various obligations under the FAR bill. They stated the following:
In our view, the broad approach to 'connected entities' and thus 'significant related entities' of [Registrable Superannuation Entity] RSE licensees (including when combined with the extension of certain obligations to the 'relevant group' of the accountable entity) will substantially increase the regulatory impact of FAR without achieving the regulatory benefits intended by the FAR bill or the Financial Services Royal Commission.
2.24
However, evidence provided to the committee by Treasury addressed the issues raised in relation to the uncertainty surrounding, and potential unintended consequences of the bills:
I understand King & Wood Mallesons and others have raised some concerns around the concept of significant related entity and how it works with super. So we are aware of those … there is some level of uncertainty just because this is a very broad regime. It's trying to cater for a diverse range of structures, and so we can't be too prescriptive … We're trying to make sure that it's neutral across all structures, so for that reason the law does have some general application, and some certainty does still persist.
Duplication of compliance obligations
2.25
The Law Council of Australia, King & Wood Mallesons and BCA voiced their concern that the proposed accountability obligations for both executives and entities, will have the effect of duplicating compliance obligations on individuals with existing financial services laws.
2.26
Regarding the obligation to take reasonable steps, King & Wood Mallesons submitted:
We remain concerned that this is essentially an obligation to comply with existing obligations. Accountable entities themselves are already required to comply with these laws by virtue of the underlying laws themselves, as well as by virtue of the AFSL and credit licences. Further, overseeing the entity's compliance with law is already part of each accountable person's ordinary managerial responsibilities and their existing obligation to carry out their responsibilities with due skill, care and diligence, particularly in combination with sections 22(c) and (d) which expressly deal with identifying and responding to issues and non-compliance… While we note the expectation that accountable persons will oversee compliance with law within their respective areas of responsibility… the introduction of section 21(d) in its present form is redundant and does not achieve the FAR's objectives.
2.27
The BCA noted that the inclusion of accountability obligations in the FAR bill for both executives and entities will have the effect of re-casting FAR as a compliance-orientated regime rather than an accountability regime. In its submission to the inquiry, the BCA reiterated views expressed by King & Wood Mallesons stipulated above.
2.28
The Law Council of Australia submitted that the accountability obligations to take 'reasonable steps' would be not only a duplication of existing obligations, but arduous, expressing their concern that this obligation will divert the attention of accountable persons from more material issues within their responsibilities, arguing:
The most onerous new aspect of FAR is the individual accountability obligation to take reasonable steps, in conducting the responsibilities of their position as an accountable person, to comply with a long list of laws, including all the financial services laws and any regulations, other instruments, directions or orders made under each of them. Regulated entities are already obliged to comply with those laws and regulations.
This new obligation will increase complexity and compliance costs by also requiring each accountable person to demonstrate that they took reasonable steps, leading to potential duplication and inefficiencies without necessarily enhancing actual compliance outcomes. It also represents an increased barrier to new industry entrants. The Law Council submits that should not be included in the bill.
2.29
In its evidence to the committee, ASIC addressed the concerns discussed above, clarifying the expectations set out for accountable persons in the context of the obligation to take reasonable steps and how they would operate in practice. In his evidence to the committee, Mr Greg Kirk from ASIC stated:
The pivotal word is 'reasonable', and it's reasonable in the circumstances. If you have these responsibilities in a very large entity, there's not an expectation that you're down on the shop floor looking over the shoulder of everyone engaged in the area of activity you're responsible for; that's clearly not possible and not a reasonable expectation. It's about what the reasonable steps are in terms of managing a process, from your vantage point in your position, and what the reasonable steps are that would be necessary to manage that activity. I think the regime will sound first in the measures, entities having identified who is responsible for these things and having remuneration held back, where there's big discretionary remuneration involved. They are the front line in terms of making sure people do their jobs properly.
2.30
In terms of concerns regarding the possible duplication of laws and obligations, Dr Sean Carmody from APRA advised the committee that there would be processes and practices in place to ensure that, where there is a breach, the matter is dealt with appropriately under the FAR, so that an individual is not penalised for the same breach of conduct more than once:
The general issue of whether certain actions or events or incidents can trigger things under multiple pieces of legislation is, in a sense, something that we're left with today. Some of the issues with the big anti-money-laundering [AML] breaches and so on can be issues under the AML acts and the Corporations Act. These sorts of things are rarely isolated to a single matter. There's always a process of asking what the most appropriate way of pursuing this matter is.
2.31
Further, in providing evidence to the committee that there would not be a complete overlap in obligations, Mr Kirk spelt out the rationale for the measures to achieve the objective of the FAR of strengthening accountability:
… the regimes are looking at different things. The existing conduct laws that we administer are really around the conduct involved, whereas the FAR is to have clarity about accountability and the background for conduct so that people know who is responsible; most particularly, so that people know who within the organisation is responsible or accountable… It also means that, if we're looking at a piece of traditional misconduct, because they have those internal arrangements in place—they have responsible people—our examination of why the misconduct occurred is facilitated. Again, it doesn't necessarily mean that there will have been a breach of FAR, but it means we'll quickly be able to identify who in the organisation is responsible for the area of activity and who we need to speak about it.
Civil penalties
2.32
Consumer groups voiced their concern that the absence of civil penalties for individuals in the FAR regime would remove personal liability and consequences that deter senior leaders from engaging in misconduct.
2.33
In its submission, Choice stated their concerns in relation to the lack of civil penalties in the FAR as follows:
It is critical that finance leaders are personally liable for misconduct. The Banking Royal Commission revealed that executives had engaged in or turned a blind eye to misconduct but had rarely faced personal consequences… The level of penalties under the FAR must be set at a level which deters non-compliance and is seen as more than the cost of doing business.
2.34
King & Wood Mallesons and BCA submitted that under clause 81 of the bill, individuals will be subject to a new ancillary liability regime which will deem them liable if they aid, abet, procure, counsel, or induce breaches of the FAR by an accountable entity, and that this will apply to any person not just an accountable person. Both argue that civil penalties should not be imposed without intent and that this should be put beyond doubt in the Explanatory Memorandum.
2.35
However, the ABA disagreed with the perspective that civil penalties should be introduced:
The ABA welcomes the decision not to proceed with a civil penalty for individual accountable persons under the regime, given there is no evidence to suggest the current BEAR enforcement rules are ineffective.
Our view is that the regime doesn't need to include civil penalties for breach of the accountability obligations and the reason is that the regime includes significant personal consequences for those accountable persons Obviously, there's the loss of variable remuneration, which can be significant in some cases, and more significantly there's the ability for APRA to disqualify the executive from being an accountable person at that entity and at other entities in the industry and this has far reaching financial impacts and personal impacts in terms of the person's career prospects going forward.
2.36
The AICD submitted that the application of civil penalties on accountable persons would be a punitive and unnecessary step in the context of the existing director liability environment and the new powers available to the regulators? and the fact that it was not recommended by the Royal Commission. It stated:
The Royal Commission did not recommend the introduction of civil penalties under the BEAR or its extension to all APRA-regulated entities… In addition to director duties under the Corporations Act 2001, directors of ARPA-regulated entities face specific penalty regimes based on the relevant industry act (e.g. Banking Act 1959) and the APRA prudential standards that apply to the entity. Further the bill will provide both APRA and ASIC with extensive powers and penalties in respect of any accountability failing or breach by an accountable person, including disqualification of an accountable person.
2.37
Finally, the Australian Financial Markets Association (AFMA) submitted that the reintroduction of personal penalties is not necessary or appropriate as the bill proposes a substantial penalty which extends beyond the policy scope of the Royal Commission recommendations; and furthermore, it would create a work environment that puts accountable persons at risk of significant financial harm for matters over which they may not have control.
Deferred remuneration
2.38
The proposed FAR requires accountable entities to control payment of an accountable person's variable remuneration, such as bonuses and incentives in several ways. Whilst there was overall support for the requirement to defer variable remuneration to ensure that accountable persons have incentives to promote effective risk management and are held to account for decisions that have negative long-term consequences, stakeholders were concerned that the proposed obligations were insufficient.
2.39
In its submission to the committee, RACQ argued that deferred remuneration obligations should be aligned to the APRA Prudential Standard CPS 511: Remuneration, so that it applies only to entities that are above the Enhanced Disclosure Thresholds which align to APRA's thresholds of Significant Financial Entity. It was concerned that the proposed obligations would have a significant impact on small businesses:
We note that the deferral mechanism for variable remuneration of smaller entities (rated by employees at a 100% dollar valuation) is often based on cash already earned versus long term, unearned share/equity option structures for larger entities which are often rated at a 50-60% dollar valuation by employees. As such applying the deferred remuneration obligations will place smaller entities, which often do not have access to share/equity options, at a financial disadvantage to larger entities when it comes to hiring and retaining talent.
2.40
Similarly, the FSC felt that clarity is required regarding a potential mismatch between the FAR and CPS 511. It argued:
The implication for companies is that for accountable persons who join between 1 July 2023–31 December 2023, their variable reward arrangements will need to comply with FAR from their joining date and not 1 January 2024, although CPS 511 variable reward arrangements for all employees can still commence complying from 1 January 2024.
2.41
Likewise, the AICD commented:
We note that the potential misalignment between the FAR deferred remuneration obligations and APRA's new prudential requirements under Prudential Standard CPS 511 Remuneration continues to cause concern for entities and accountable persons and this area should be a priority for regulator guidance.
2.42
Choice argued that the bill, in setting an obligation to defer 40 per cent of variable remuneration for at least four years, would be a step backwards compared to the existing obligations under the BEAR. It submitted that the bill should be amended to reflect international best practice and standards, such as those in the United Kingdom (UK). In the UK firms must apply a deferral period of no less than seven years for the variable remuneration of senior managers, and no less than five years for senior risk managers and material risk takers, with the option of extending the period of up to three years in the event there are outstanding internal or regulatory investigations.
2.43
Nevertheless, in expressing its support for the inclusion of deferred remuneration obligations within the FAR, Choice recommended that the model adopted is bolstered:
Deferred remuneration obligations can discourage inappropriate risk-taking that harms consumers and can help to eliminate culture a of 'short-termism'. This can be achieved through requiring 100 per cent of an accountable person's variable remuneration obligations over a seven-year period. We strongly support their application to the financial services sector.
2.44
Notwithstanding the concerns raised by stakeholders above, APRA clarified that that overall, the FAR and APRA's CPS 511 are consistent. APRA submitted:
[The] CPS 511 is broader, focused on a wide range of remuneration practices across APRA-related entities and applied to a broader range of individuals. In the specific area of variable remuneration deferral, CPS 511 adopts a risk-based approach and, for significant financial institutions it requires longer deferrals than the minimum requirements of the FAR. CPS 511 also requires deferral requirements to be in place for certain groups of employees beyond the Accountable Persons covered by the FAR. The language used in CPS 511 was drafted to be consistent with the proposed FAR legislation.
Joint administration, rules and regulation
2.45
Some stakeholders were concerned that elements of the FAR are not contained in the primary legislation. In particular, they were concerned that the joint regulation arrangements between APRA and ASIC, the breadth and concept of accountable persons and prescribed ministerial rules, regulations and guidance materials were not included.
Joint administration arrangements
2.46
In their submissions and evidence to the inquiry, stakeholders sought more clarity on a practical level, whether through the joint administrative agreement or through other guidance available to industry an outline of responsibilities of the regulators and details of engaging with ASIC and APRA, would be provided.
2.47
The ABA noted that whilst it is supportive of the shared regulatory and administrative powers for the FAR, it recommends:
A clear and comprehensive administrative arrangement is entered into between the regulators, as ensuring effective coordination between regulators will contribute to the efficiency of the FAR and provide greater certainty regarding its operation. This coordination should include alignment of expectations across conduct and prudential standards set by ASIC and APRA respectively.
Where enforcement actions are taken, only one regulator should pursue those actions.
2.48
Similarly, the AICD expressed its concerns with how some of the regulator powers are drafted as well as uncertainty regarding the joint administration arrangements. AICD submitted:
While we welcome the requirement for the regulators to reach a joint administration arrangement under section 37, this document needs to be sufficiently detailed. An arrangement that is brief and solely principles based is unlikely to provide sufficient insight to entities and accountable persons.
We also encourage the committee to recommend the two regulators provide comprehensive practical guidance to industry. This guidance would cover key areas of interpretation, such as 'reasonable steps' and how to deal with the regulators in a 'cooperative manner.
2.49
The FSC stated that it would also welcome the early release of joint regulatory guidance from APRA and ASIC and the opportunity for industry to participate widely in testing of the relevant single portal.
2.50
In its submission to the inquiry, APRA advised that a detailed public Joint Administration Agreement (JAA) is being drafted by the regulators. It will set out the principles of cooperation and arrangements for the joint administration and cover; oversight of the arrangements, exercising of powers, industry communication, information sharing, and enforcement and investigation. APRA also stipulated that the JAA will, among other things, clearly define roles and responsibilities between the regulators, supported by agreed processes and procedures. Further, APRA submitted industry communication and guidance will also be published to support industry with the implementation of, and ongoing compliance with, the FAR.
Clarification of Ministerial rules and regulations
2.51
As outlined above, one of the issues raised by submitters was in relation to elements of the FAR not contained in the primary legislation, for example, the breadth and concept of accountable persons and prescribed draft ministerial rules.
2.52
For example, King & Wood Mallesons expressed concern that the details in relation to prescribed accountable person roles would continue to evolve, namely the responsibilities and positions that should result in a person being an accountable person. It stated the following:
The FAR Bill provides for these matters to be addressed in the Ministerial Rules, which have not yet been released for consultation… Given the material concerns raised by businesses to date in connection with the prescribed responsibilities and positions, we recommend that the Minister Rules be released in draft for consultation prior to the passage of the bill.
2.53
The Customer Owned Banking Association (COBA) also shared the concern that ministerial rules, regulations and other guidance material, are not yet available. The suggested that, as a result, the lack of certainty would pose challenges for industry to understanding the full extent of the obligations they face and would magnify the complexity of the implementation process for regulated entities. COBA submitted that this factor is accentuated by the joint regulation arrangement and recommended that the development of the key elements of the FAR should be subject to appropriate consideration and consultation.
2.54
Whilst expressing that it would be helpful to have early sight of draft rules and greater certainty as to the ambit of prescribed positions and responsibilities, in verbal evidence to the committee, Mr Ashley Davies from the FSC, acknowledged the rationale for prescriptive definition of accountable person within the bill:
Mr Davies: …the prescribed position and prescribed responsibility issue is, of course, subject to ministerial rules. There is uncertainty on what those rules are going to say…
CHAIR: Do you accept the proposition, though that one of the things we must be careful of in legislation is making sure that there are no gaps and no lacunas so there is at least one accountable person with respect to each relevant part of the business and we don't get into a situation where the definitions work in such a way that parts of the business aren't covered?
Mr Davies: Yes, I think the spirit of the legislation is accepted in that regard…
2.55
In response to the suggestions that the prescribed accountable person roles require clarification, APRA highlighted the risks associated with providing detailed guidance to industry. On this point, Dr Carmody from APRA stated:
One of the dangers about trying to be too detailed and prescriptive in how to interpret these terms is that you risk having something that tries to be one-size-fits all, which doesn't make sense for the breadth of organisations. There are actual risks in trying to provide detailed guidance on what reasonable steps should be … it should be up to each individual organisation to determine: 'We're ultimately responsible for these issues in our organisation. What do we think ourselves?' it is up to them to form the view themselves as to what the reasonable steps would be. That will necessarily vary industry to industry, entity by entity—size, complexity and so on.
Commencement
2.56
In their respective submissions, the ABA and COBA both raised concerns regarding the commencement date of the FAR.
2.57
The ABA submitted that due to the complexity of the bill and challenges of implementing new measures that were not part of the BEAR, nine months after the commencement of the bill would be a more realistic timeframe to provide organisations subject to the FAR with an opportunity to appropriately prepare for and implement relevant systems and processes.
2.58
Similarly, COBA stated that, given the extent of the uncertainties around the regime, commencement of the FAR should be no earlier than six months after all elements of the regime (including ministerial rules, regulations, guidance) are finalised. COBA submitted:
it is crucial that development of these elements are subject to appropriate consideration and consultation. Once finalised, regulated entities will need adequate time to understand the full scope of the regime and allocate responsibilities, update accountability maps and statements, review the entity's risk position, update reporting systems and obtain board approvals.
Compensation Scheme of Last Resort
Support for the reforms with modification
2.59
Overall, submitters and witnesses to the inquiry expressed support for the establishment of a CSLR. Many submitters noted that the bills would implement the Ramsay Review and Royal Commission's recommendations for a CSLR in Australia and, would improve consumer and small business access to redress by implementing an industry-funded, forward-looking targeted scheme that extends beyond personal financial advice failures.
2.60
In its submission, the Mortgage and Finance Association of Australia (MFAA) commented:
The MFAA supports the implementation of the Financial Services Royal Commission Recommendation 7.1—that the government establish an industry compensation scheme, consistent with the Supplementary Final Report of the Review of the financial system external dispute resolution and complaints framework (Ramsay Review). The scheme will provide an additional layer of protection to remediate consumers that have suffered loss resulting from poor conduct by financial firms.
2.61
Inquiry participants representing consumer groups were supportive of the Government's proposed establishment of a CSLR to bolster protection for consumers. Choice stated:
There is broad support, not just within the Parliament but also among industry groups and a range of professional bodies, for putting a scheme in place.
…
A well-designed CSLR is a missing link in the financial services architecture in Australia… Casework organisations witness first-hand the impact of the lack of a CSLR on people and the Australian community. It is a disillusioning and unjust experience for families who suffer a loss to go through the lengthy dispute resolution process and have compensation awarded in their favour, only to be told they won't receive any money.
2.62
The Self-Managed Superannuation Fund Association (SMSF Association) also supports measures which strengthen consumer protection, stating:
We have been a long-term advocate of the need for a compensation scheme of last resort for the financial services sector and we are pleased to see legislation to give effect to such a scheme now before the parliament.
2.63
CPA Australia is also supportive of the establishment of a CSLR commenting that it will support confidence in the financial system's external dispute resolution framework:
CPA Australia believes it is essential that there is an appropriate external dispute resolution framework for the financial services sector that ensures industry participants are accountable for the financial products and advice they provide. The framework should appropriately protect consumers and where necessary, allow them access to adequate compensation and redress.
It is for these reasons that CPA Australia supports the Government's intent to establish a CSLR which will help fulfil this objective while also supporting confidence in the financial sector's dispute resolution framework.
2.64
In terms of the overall objectives of the proposed scheme, Maurice Blackburn Lawyers commented:
We believe that the model presented in the Bill is, across the board, sound and robust, and a good reflection of the feedback received following Treasury's consultation process over 2020 and 2021.
2.65
The FSC recommended 'that the Parliament pass the bills, as they strike the correct balance in protecting consumers without burdening the industry, and customers of well-run organisations that have done nothing wrong, with additional costs'.
2.66
Finally, the BCA submitted that it fully supports the package of the bills for the establishment of the CSLR and believes that they are satisfactory and should be passed without amendment.
2.67
However, most of the submissions supporting the bills recommended amendments to the bills before they are passed. Possible amendments are discussed in more detail below.
Scope of the proposed CSLR
2.68
A number of submitters expressed concerns that the scope of the proposed CSLR needs to be expanded in order to provide greater protection for consumers and restore trust in Australia's financial system. Several thought that the scheme should be expanded to all financial services, while others also suggested that it be expanded to also include court and tribunal decisions.
2.69
In its submission to the inquiry, Choice commented:
Putting in place a broad, fair compensation scheme is really fundamental to restoring trust. There are a few key things that we think need to be improved in the bill in order to achieve that. The first is to expand the scope of the scheme so it covers all financial services covered by the Australian Financial Complaints Authority (AFCA) or, as an absolute minimum, managed investment schemes (MIS), funeral insurance policies and debt management firms… Others are to ensure the scheme covers both court and tribunal decisions.
2.70
Maurice Blackburn Lawyers submitted that a CSLR limited only to consumers with AFCA determinations would prejudice consumers who elected to pursue court proceedings rather than going through AFCA. It commented:
This is an inherently unfair outcome… To remedy this, and provide fair compromise, Maurice Blackburn submits that the CSLR should respond to court and tribunal decisions, up to the standard jurisdictional cap for the CSLR applying to AFCA matters, where the consumer would have been eligible for AFCA coverage at the time the court or tribunal proceedings were commenced.
…
By limiting the CSLR to only respond to unpaid AFCA determinations, consumers will be understandably less inclined to pursue litigation whilst their AFCA matter is processed for fear that their access to the CSLR will be denied or prejudiced.
2.71
CPA Australia commented that unless the scope of the CSLR is amended to include all financial products, not all consumers who engage with an ASIC-regulated financial product, with or without seeking professional advice, will have access to adequate compensation and redress. CPA Australia expressed concern that this would mean that MIS and other complex financial products would be excluded.
2.72
Similarly, the Financial Planners Association (FPA) argued:
A CSLR should have broad coverage that reflects AFCA's jurisdiction to hear financial services complaints for multiple financial services classes and appropriately apportion responsibility between them.
The government's proposed CSLR is simply too narrow in scope, provides inadequate coverage to consumers and does not address the underlying causes of unpaid determinations.
2.73
The Sterling First Action Group also recommended the extension of the scheme to MIS's commenting that 'should MIS's be totally excluded from the scope of the CSLR, it would deliver a devastating injustice to the victims of the Sterling Group collapse'.
2.74
Whilst articulating the view that the scheme should be broadened to include any financial services classes under APRA's jurisdiction (including MIS's), Mr Peter Burgess from the SMSF Association commented on the need to balance the scope of the CSLR with cost to ensure sustainability:
It is a balancing act between reducing the cost of compensation payable under the scheme and making sure that consumers have access to adequate levels of compensation. Essentially, it gets back to whether we believe consumers have a right to be compensated, or have appropriate options to seek compensation, if they suffer misconduct by others. In our view, they should have that right. But I absolutely agree with you it's about finding the right balance between the cost and making sure they have access.
2.75
Similarly, in evidence to the committee, Mr Philip Anderson from the Association of Financial Advisers (AFA) acknowledged the rational for the scope of the proposed CSLR noting the importance of sustainability:
CHAIR: There was a concern expressed in the Ramsay panel recommendations with respect to the establishment of a CSLR which was too wide, in the context that it might not be sustainable in the long term … that's a concern I have, especially when we talk about black swan events and large MIS, which fail from time to time, and the impost that would have on a scheme…
Mr Anderson: I agree that's an important consideration in the design of this scheme, and the legislation that we have in front of us has put mechanisms in place. There's a cap of $250 million, and there's a mechanism for the contributors to be broadened in the event of a black swan event. Nonetheless, you're absolutely right—sustainability of this scheme is really important.
2.76
Noting the importance of balancing the risks and ensuring the scheme's sustainability, the Association of Superannuation Funds of Australia (AFSA) commented:
The scheme's introduction involves a difficult balancing act: addressing the plight of consumers who have been unable to secure compensation that is due to them from a financial services provider while not overburdening the industry... There are no simple solutions, and the model adopted in the bills is the result of an extensive process of consultation across many years, many inquiries and many reviews. In this context, ASFA consider the proposed model to be appropriately targeted and we support its passage through Parliament. We welcome the implicit recognition that many subsectors have never contributed to the issue of uncompensated losses in a historical sense and are highly unlikely ever to do so.
2.77
Importantly, despite its concerns raise above, CPA Australia noted that the proposed scheme was broader than that initially envisaged by the Ramsay panel or Hayne report insofar as it considers other areas of financial advice that were not recommended, such as advice given by brokers to retail customers. In her evidence to the committee, Mrs Keddie Waller from CPA Australia acknowledged that 'it's certainly broader than the initial recommendation'.
2.78
The FSC had similar views:
The CSLR proposed in the bills is consistent with, and also goes beyond, the Ramsay Review recommendations. The scheme will cover personal financial advice, which historically, has been the largest source of unpaid determinations, as well as covering credit activities and dealing in securities (other than issuing securities) for retail clients.
2.79
The AFMA bought to the committee's attention the potential risks associated with further broadening the CSLR to include financial services such as MIS's:
AFMA strongly opposes extending the scheme to any category or set of categories of investment (MIS's). To do so would create a major moral hazard for investors and have distortionary effects on markets, capital allocation and the economy … if a particular investment type (such as MIS) was subject to the scheme it would place the downside risks for investors in this investment type on others (specifically firms supporting the CSLR) while keeping the upside risks—financial gains—for the investor. Investors would be strongly incentivized to take on any risk…
2.80
Further, the ABA had similar views, referring to the recommendations of the Ramsay review and recommendations of Commissioner Hayne. It highlighted to the committee that, if the scheme was expanded to include MIS's, and if MIS failures were systematic and significant, the financial resources of the scheme would very quickly be exceeded—triggering the need to impose an additional levy. The ABA submitted:
… [our] position on MIS and having a broader scheme than financial advice more generally is informed by the Ramsay review and the recommendations of Commissioner Hayne. Both of those processes were extensive. They benefited from a lot of evidence: submissions made, data and evidence from affected customers. Both of those processes concluded that a scalable scheme covering financial advice was the appropriate response at this stage. That really informs our position around having a scheme that is initially limited to financial advice.
To ensure a successful and sustainable, compensation scheme, the ABA supports a scheme that is initially limited to financial advice failures. The scheme should be scalable to potentially include other services where there is clear evidence of continuing unpaid determinations and the potential liability of the scheme is modelled and well understood. This position is consistent with the recommendations of the Ramsay review which were endorsed by Commissioner Hayne.
2.81
The Stockbrokers and Financial Advisers Association (SAFAA) further expressed the view that the proposed CSLR should not be expanded to include all financial services such as wholesale investors, commenting:
We don't think that the CSLR should extend to wholesale investors. They have financial resources to be able to take matters through the court. Again, the Treasury review of AFCA made it clear that they think AFCA should in fact be more careful in exercising its discretion to take complaints from wholesale investors, because the system was being gamed to some extent by people who had the financial resources to take matters through the court but could see that they could go to this free system. So we think extending the CSLR is not a wise idea.
2.82
Importantly, ASIC provided evidence to the committee that demonstrated the number and significance of reports of misconduct (ROMs) in relation to MIS's. ASIC stated that while there have been collapses involving registered MIS's, and their impact on members can be significant, these represent a small proportion of the overall sector:
ASIC received very few MIS ROMs, compared to the total number of reports of misconduct received overall—MIS ROMs constituted 1.3% of total finalised ROMs in 2020-21.
All MISs involve risk, and each scheme has different risks based on the assets they invest in. Prospective investors must make sure they properly consider the risks of a particular investment before investing.
2.83
To provide a backdrop of complaints received in relation to each sector, the committee also received evidence from AFCA outlining the percentage of AFCA total closed complaints by sub-sector received from 1 November 2018 to 30 January 2022:
Table 2.1: Closed complaints with determinations in favour of complainant and by primary business
|
|
|
|
|
|
MIS operator/fund manager
|
62
|
34.4
|
5
|
|
Funeral Insurance provider
|
56
|
31.1
|
1
|
|
Financial advisor/ planner
|
25
|
13.9
|
8
|
|
Derivatives dealer
|
21
|
11.7
|
3
|
|
Securities dealer
|
7
|
3.9
|
3
|
|
Foreign exchange dealer
|
4
|
2.2
|
1
|
|
Mortgage broker
|
2
|
1.1
|
2
|
|
Corporate advisor
|
2
|
1.1
|
1
|
|
Make a market
|
1
|
0.6
|
1
|
|
Total
|
180
|
100
|
25
|
Source: AFCA, Answer to questions on notice, 27 January 2022 (received 3 February 2022).
2.84
Further, Treasury confirmed that analysis of potential CSLR liability and decision not to include MIS, funeral insurance and other prescribed categories within the CSLR reflects the relevant complaint data provided by AFCA held by Treasury at the time the analysis was conducted.
Design of the scheme
2.85
Another concern raised by stakeholders was the design of the proposed CSLR, in particular, that it would create a moral hazard with sectors with few to no unpaid determinations 'footing the bill' of 'irresponsible' sectors.
2.86
In its submission SAFAA submitted that the proposed scheme is based on out-of-date data from the Ramsay review conducted in 2016-17 and does not take into account recent data. They contested that more current statistics show low levels of AFCA complaints against financial advisers in general, and that stockbrokers and small firms are more likely to give rise to unpaid determinations than larger firms, which have more resources and more robust Professional Indemnity Insurance (PII). SAFAA stated:
…SAFAA has serious concerns with the design of the CSLR which we raised with Treasury during its consultation on the CSLR Proposal Paper in August 2001. Our particular concern at the time was that under the proposed design those who had zero unpaid determinations were paying for the scheme, while those most likely to have unpaid determinations were exempted from contributing to the cost of the scheme due to the application of the $1,000 minimum levy threshold. SAFAA pointed out at the time this outcome would result in moral hazard.
2.87
Similarly, Mr Dallas Booth also suggested that the proposed CSLR establishes a process whereby responsible financial services organisations (FSO) are required to fund the losses incurred by irresponsible FSOs. Mr Booth submitted that large and small FSOs will carry the burden of another industry levy, which will have an impact on clients of responsible firms.
2.88
However, the AFA disagreed with this perspective noting that there are advantages of having a broader scheme in restoring consumer confidence in the financial services sector as a whole. AFA commented:
There are broader benefits of a CSLR that extends to the entire banking and financial services industry, in that it gives consumers greater confidence to purchase financial products. Whilst we recognise that a CSLR is most likely to be relevant in the case of the failure of small businesses, the benefits of the scheme also flow to bigger businesses. We fully appreciate that banks, insurers and super funds, which are all prudentially regulated, are unlikely to cause unpaid determinations. For this reason, we propose that whilst the direct cost of compensation for unpaid determinations should be funded by the sectors that generate the unpaid determinations, we believe that there is a role for the broader industry to contribute to the cost of the establishment and administration of the CSLR. Consumers are less likely to appreciate what might drive unpaid determinations, however the CSLR will assist all consumers to have greater confidence.
2.89
Finally, in her evidence to the committee, Ms Zaheed from Treasury confirmed that the importance of striking an appropriate balance between costs, sustainability of the scheme and the objective strengthening consumer protection was acknowledged in the design of the proposed scheme:
There were two sides of the views presented. One was the view around the 'moral hazard'. The other view issue that was raised was, in the mortgage-broking sector and the financial advice sector, depending on how you were structured, whether you held your own licence or you were an authorised representative, you could be paying the fees because your licensing passes that through. Again it's a balancing act between thinking about the costs that are imposed on very small financial services licensees and mortgage brokers, because as a system we want competition; we don't want a system that is just full of major players and doesn't have small players. The regulatory costs generally hit the smallest players the hardest. It's a balancing about between that and ensuring there are sufficient disincentives in the system for misconduct.
Underlying causes of unpaid determinations
Establishing a genuine scheme of 'last resort'
2.90
Several submitters recommended that mechanisms be put in place to ensure that the CSLR is a genuine scheme of 'last resort'. They thought that making sure that firms are adequately capitalised and hold appropriate PII is a better approach to improving consumer confidence in compensation outcomes in the sector rather than relying on a CSLR.
2.91
The SMSF Association submitted that stronger regulation and oversight of PII and the issues surrounding PII urgently needed. To support this claim, they noted that neither the regulations nor ASIC guidance prescribe minimum requirements or cover inclusions (such as the requirement for run-off cover) and that minimum adequacy requirements are not? actively monitored. Specifically, it stated the following:
The level of oversight needs to be more robust with standards actively monitored and upheld. Likewise, the regulations require strengthening… Compulsory measures should be in place to provide a minimum level and duration of run-off cover where a financial services business cease. Where the business seeks to reduce the scope of its licensed activities, similar arrangements for run off cover should be in place for the services no longer offered in addition to the PII required for the ongoing business operations.
Similarly, greater work needs to be done with the insurance sector to ensure that policies that meet the required standards are available to the market and are fit for purpose. This has been left unchecked for far too long and has resulted in issues such as limited access to run off cover.
2.92
Mr Brad Vermeer from the FPA also commented on the need to undertake a review of PII prior to the scheme's implementation:
Effective PII is also a key pillar of ensuring a sustainable CSLR. We are concerned that currently there is an ineffective oversight and monitoring of this mandatory obligation and we support the government's review into the PII market as part of the implementation of this bill. However, we believe it would be prudent for this review to be completed before the scheme comes into operation.
2.93
Likewise, the ABA argued for a review of PII, for powers for ASIC to conduct the review, for greater scrutiny of the financial requirements of licensees, and for granting ASIC appropriate enforcement powers to take action against licensees that have unpaid determinations. They also thought that individuals should be prevented from establishing a new financial services or credit assistance business as mechanisms to reduce claims being made against the CSLR. The ABA stated that having adequate PII is one way that you avoid the scheme being necessary or it being necessary to draw on the scheme.
2.94
The FSC, Institute of Public Accountants (IPA) and CPA Australia all submitted that strengthening requirements to ensure that all licensees hold appropriate PII would provide a first line of defence for consumers seeking compensation, and effective ASIC oversight would allow the scheme administrator to identify and claim on insurance where there is an unpaid determination before moving the cost onto industry more broadly by coordinating spot checks.
2.95
Treasury informed the committee that it has commenced a review of PII, with a focus on its responsiveness to the proposed CSLR. In evidence to the committee, Ms Zaheed from Treasury noted that ultimately, PII operates in a private market with a lot of pressure in terms of profitability, which has meant that supply has reduced in each sector. Ms Zaheed also stated that the review includes MIS's, the legal terms within contracts that would preclude the CSLR from the right to make claims against PII policies, an investigation of whether this can be changed, and what this would mean for insurers' willingness to provide PII in the Australian market.
Compensation Cap
2.96
Proposed section 1067 to bill stipulates that the maximum amount of compensation that may be offered to the consumer under the CSLR is limited to $150,000. If the AFCA determination is for a greater amount, the amount in excess of $150,000 is not compensable under the CSLR but remains a debt owed to the consumer which can be pursued outside of the CSLR. The amount offered to consumers under the scheme must account for any amounts separately received by the consumer as a creditor in an external administration process, where the payment relates to the matters covered by the determination and any amounts, they are eligible for under a statutory compensation scheme where the eligibility for compensation relates to the matters covered by the determination. Finally, the amount offered to the consumer under the CSLR, must take account of any amounts that have already been paid to the consumer, if the payments are of a kind prescribed by the regulators.
Amount of compensation payments
2.97
Several submissions to the inquiry expressed concerns regarding the proposed compensation cap of $150,000 and argued that it should be increased to align with the compensation cap of AFCA (currently $542,500) to ensure fairness for consumers who, through circumstances not of their making, may end up reliant on a CSLR.
2.98
Maurice Blackburn Lawyers submitted that the stated cap risks undercompensating many victims of poor corporate behaviour and that any cap should be expressed in terms directly related to the compensation cap available to consumers through AFCA, as proposed in the recommendation 7 in the Senate Legal and Constitutional Affairs References Committee report inquiry into the resolution of disputes with financial services providers within the justice system, of $2 million per consumer is appropriate. Maurice Blackburn Lawyers submitted:
We believe that any cap should be expressed in terms directly related to the compensation cap available to consumers through AFCA.
It is worth noting that Commissioner Hayne, in his final report, suggested that the cap for the scheme should 'be aligned to AFCA's' … We suggest that the CSLR cap should be expressed as a sliding scale, embedded in the regulations, using the AFCA cap as its comparison point.
Utilising a flat rate cap means that the most profoundly impacted victims of poor corporate behaviour will be impacted most by the cap—especially if that cap is set as low as $150,000 (13% of what they may have received if circumstances did not force them to rely on the CSLR).
2.99
The Sterling First Action Group submitted that the proposed cap for each AFCA determination 'will be inadequate to cover the financial losses of Sterling Group victims'. Although it disagrees setting a cap, it argues that if a cap is to be imposed, it should be indexed accordingly to increase, and continue to align with AFCA claim limits over time. The group submitted that if this recommendation is not viable, the CSLR compensation limits should be set at 80 per cent of the maximum AFCA claim limit of $542,000 for direct financial loss.
2.100
Choice felt that the cap is too low for some individuals who have suffered losses from financial advice scandals, that it would not be sufficient to cover the damages awarded and would place these people at risk of a retirement in poverty, and was a deviation from their understanding that the scheme cap would be aligned with AFCA's $542,500. Choice however acknowledged that a $150,000 compensation cap would be sufficient to cover the compensation bill for most clients that its casework organisations assist. It also expressed support for the Minister having the discretion to increase the annual scheme cap of $250 million as this would provide the scheme 'with enough flexibility and adaptability to cater for unlikely "black swan" events'.
2.101
This view that the cap should be higher was not universally shared. The ABA submitted that the proposed cap of $150,000 is vital for the long-term sustainability of the scheme and, again for balancing the obligations of industry to fund the scheme with consumer rights to compensation. The ABA argued that it is important that the proposed cap is retained to allow funding organisations to estimate emerging liabilities, whilst balancing the need to provide fair compensation to claimants from scheme contributors.
2.102
The AFMA also supported the proposed cap, stating:
We understand that certain parties wish to raise the scheme cap on claims. In AFMA's view the cap is consistent with the aim of the scheme to provide some substantial but ultimately limited compensation where not is available from the firm that caused the harm. Putting to one side the general principal as to whether firms that have not caused harm and were not in a position to influence those that did should pay the compensation bill, there is a strong argument that they should not be liable for unlimited claims from each individual that has unsuccessfully pursued a claim against a (typically failed firm).
The cap is designed to reflect the UK scheme cap (set at £85,000) and is intended to balance fairness to claimants with fairness to firms that are unconnected with the harm.
2.103
Importantly, the AFA was also supportive of the proposed cap as it would likely cover the majority of claims:
In keeping with the purpose of a CSLR and with the objective of keeping costs to a minimum, we are supportive of a cap on the maximum amount that can be paid as compensation by the CSLR for any one claim. We think that the cap of $150,000 would most likely to cover the vast bulk of matters… This is an effective way to balance the competing priorities of compensating consumers for loss and carefully managing the costs of the scheme.
2.104
Similarly, Mr Vermeer from the FPA commented:
Whilst it has not be stated, we have deduced from previous statements that there might be only 20 to 25 unpaid determinations every year. This suggests that the cost per unpaid determination could be in the vicinity of $150,000.
2.105
Furthermore, the FSC also indicated support for the proposed cap, stating that reasonable claims caps are needed to ensure that the CSLR is sustainable and administratively efficient, where there are clear barriers and parameters around cost. In their submission to the inquiry the FSC submitted:
The $150,000 CSLR compensation limit represents 28% of the maximum that AFCA can award at $542,500. The UK Financial Services Compensation Scheme can award up to £85,000 to eligible persons which is 24% of the maximum award payable to the UK [Financial Ombudsman Service] FOS at £350,000.
Setting an appropriate cap will help maintain competition in financial services sectors (by reducing the likelihood that CSLR costs act as barriers to entry or expansion) and will help to ensure viability of the scheme. It also recognises that the compensation being paid by the CSLR is funded by well resources entities, who are not responsible for the misconduct of consumer losses.
CSLR levy
2.106
The proposed CSLR levy framework creates a tax to be levied against relevant financial services industry entities in order to fund the scheme, to an overall scheme levy cap of $250 million. A sub-sector levy cap of $10 million is also proposed, though may be increased in the regulations or where a relevant ministerial determination is made.
Impact on industry and consumers
2.107
A number of submissions raised concerns about the proposed CSLR levy and the impact that it will have on industry because of increased administrative and operational costs. Stakeholders were concerned that these would not be sustainable for industry members and that the estimated scheme administration costs are high.
2.108
Charted Accountants Australia and New Zealand (CA ANZ) submitted that the levy requested from advisers needs to be sustainable and it believes the funding of the proposed CSLR will add additional red-tape with significant associated cost to business. CA ANZ felt that escalating regulatory costs have caused a exodus of advisers from the industry, particularly those operating small and medium size businesses, who are unable to afford increasing costs. They added that the unknown quantum of the levy has contributed to this uncertainty.
2.109
Similarly, CPA Australia also felt that the proposed scheme would add cost and complexity to doing business and the associated risk is that financial advice may become less accessible and less affordable for consumers.
2.110
Likewise, CA ANZ and the SMSF Association also submitted that cost increases because of the levy will inevitably be passed on to consumers which will in turn make access to quality financial advice less affordable.
2.111
The FSC, AFA and FPA argued that whilst there is no opposition to providing funding for the redress of unpaid determinations through a levy on industry, there should be focus on reducing the administrative costs of the CSLR, with the estimated establishment and annual administration costs would come close to 50 per cent of the actual funding required for the scheme.
2.112
Notwithstanding the above concerns, Treasury however, highlighted in its evidence to the committee that options to ensure that costs are reduced, and efficiencies are made were designed into the scheme. Treasury is also optimistic that the actual administrative costs will be less than estimated. Ms Zaheed from Treasury stated:
One of the reasons the legislation is designed to have ASIC administer and collect the levy is to leverage ASIC's existing industry funding mechanism so that we don't have AFCA needing to build its own version of the IFM. Those are decisions that have already gone into deciding how best to have an efficient system.
2.113
Further, Treasury noted that there is a reasonable amount of fixed costs in a system like the CSLR, in regards to developing the processes in place, and that the purpose of the legislation is to ensure there are appropriate accountability checks and balances.
Special levy
2.114
There was some discussion by stakeholders as to the special levy cost-recovery mechanism to address situations where additional funding may be needed by the CSLR. The bills provide the minister with the power to determine an additional special levy to be paid by the primary sub-sectors in which the compensation liability arose.
2.115
The ABA submitted that given the potential magnitude for and effect of a 'black swan' event on consumers, the special levy mechanism must be subject to full parliamentary approval (i.e. not enacted through a legislative instrument).
The proposal that ASIC can collect 'special levies' associated with the scheme leaves the door open for ASIC to increase the levy without prior consultation … we are concerned about the lack of appropriate accountability and transparency.
2.117
The ASFA had similar views, advising that it is imperative that this power to impose a special levy on sub-sectors not liable to pay the annual levy 'should be used only in the most extreme circumstances'. ASFA further commented that any special levy should be set for a specific period determined following consultation with industry in order to avoid cross-subsidisation.
Regulations
2.118
Commenting on the levy, some witnesses highlighted the importance of releasing the regulations relating to the CSLR levy, specifically, to allow time for consultation on the calculation methodology.
2.119
For example, the ASFA submitted that it is imperative to get draft regulations out as soon as practicable to provide industry with certainty regarding the potential levy liabilities, regarding the methodology of calculating the quantum of levies across the sectors to support the CLSR, and that consultation time with the different sectors who will be impacted is imperative.
2.120
In its submission to the inquiry, SAFAA observed that the details of which organisations will be levied and for what are amounts will be contained in regulations which have not been made available. SAFAA recommended that the bill not be passed until consultation with industry has occurred on the regulations as 'the devil is very much in the detail' when it comes to the way the levies are determined.
2.121
Similarly, the COBA submitted that entities should have more certainty about the costs under the CSLR. COBA's members are particularly concerned about the uncertainty surrounding the funding arrangements for the CSLR in future years, in light of the fact that the regulations have yet to be released.
Committee view
2.122
The committee notes the broad support for the FAR, HRCR, CSLR and Collection bills expressed by submitters to the inquiry. The translation of the Royal Commission’s recommendations into tangible legislation to establish the FAR and CSLR has been warmly welcomed. The committee agrees that the bills are vital to improving the operating culture of entities in the financial services sector and, will ensure increased transparency and accountability across the banking, insurance and superannuation industries and will overall, improve protections and access to redress for consumers.
2.123
While there was overall support for the bills, the committee notes the key concerns with the proposed reforms raised by inquiry participants in relation to the scope and design of the CSLR. The committee is of the view that the scheme, broader than initially envisaged by both the Ramsay Review and Royal Commission, is based on prior extensive evidence, consultation, and recommendations of the Royal Commission, which concluded that a targeted and scalable scheme covering financial advice was the most appropriate response. The committee believes that the proposed compensation cap and levy will ensure the long-term sustainability of the scheme. Importantly, that it correctly balances the liabilities for industry, the provision of just compensation to claimants from scheme contributors and, restoring consumer confidence in the financial services sector as a whole.
2.124
The committee notes that the accompanying regulations for the bills have not been published and this has meant that preparations for the possible implementation and compliance with the proposed legislative reforms are more difficult for interested stakeholders. However, the committee notes that the regulations will in due course be published, consulted on, and subject to parliamentary scrutiny in due course.
2.125
The committee is of the view that the outcomes of the Royal Commission should be acted upon. It is satisfied that the bills will deliver on their intent with regard to strengthening accountability and transparency in the financial services sector and improving protection and access to redress for consumers by providing compensation within the scope of the scheme. Accordingly, the committee recommends that the bills are passed.
2.126
The committee recommends the bills be passed.
Senator Paul Scarr
Chair
Liberal Senator for Queensland