“He went like one that hath been stunned,
And is of sense forlorn:
A sadder and a wiser man,
He rose the morrow morn.”

— The Rime of the Ancient Mariner (text of 1834) BY SAMUEL TAYLOR COLERIDGE

A scheme? What? Why?

You may recall that The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended the creation of a Compensation Scheme of Last Resort (CSLR) ‘to ensure that consumers and small businesses receive compensation where a financial service provider is found to have engaged in misconduct and the provider is unable to pay’.

This is hardly a new idea. The Ramsay Report first introduced the idea in 2017 to supplement the structural deficiencies of the EDR scheme, but it failed to gain traction.

To fill what the Panel regards as a gap in the dispute resolution framework, the Panel has recommended that a limited and carefully targeted CSLR be introduced for future unpaid compensation in parts of the financial services sector where there is evidence of a significant problem of compensation not being paid.

Read Ramsay EDR report

This Review is an important opportunity to ensure Australia’s external dispute resolution (EDR) framework delivers effective outcomes for users in a rapidly changing and dynamic financial system.

On 20 December 2019, Treasury released a discussion paper outlining the Government’s response; a forward-looking industry funded scheme operated by the Australian Financial Complaints Authority (AFCA).

Treasury’s response

On 20 December 2019, Treasury released a discussion paper outlining the Government’s response; a forward-looking industry funded scheme operated by the Australian Financial Complaints Authority (AFCA).

The proposed scheme extends beyond personal advice failures and is likely to more profoundly affect the industry than first anticipated. The Consultation Paper sought participants’ views on the following aspects:

1. the optimal coverage and scope of the scheme, beyond those providing personal advice;
2. the optimal funding arrangements and basis for calculation;
3. compensation limits; and
4. how to manage scheme evolution.

Read Consultation Paper

Interestingly, the introduction of the Financial Sector Reform (Hayne Royal Commission Response) Stronger Regulators (2020 Measures) Bill 2020 may decrease the need for a CSLR. We note that the Directions Bill, which is currently under consultation, will grant ASIC powers to direct AFSLs and Credit Licensees to implement changes or change behaviour to address or prevent risks  to consumers. In simple terms, the Act will allow ASIC to intervene , prior to commencing other action, if ASIC has a reason to suspect that a licensee has, is or will engage in conduct that contravenes the financial services law.

We recommend that you read the Consultation Paper and consider the likely consequences and implications of the proposal. In an environment of increasing costs, and declining margins, any additional levy- unless tied to the nature, scale and complexity of your business and your audited accounts – may make advice even less accessible to consumers. Worse still, it will be challenging to ensure that the creation of a CSLR does not simply remove participants’ incentive to minimise risk or maintain effective compliance arrangements.

The moral hazards argument is often offered to maintain the status quo. In reality, we recognise that changes are necessary but understand our history well enough to realise that may simply result in the cross-subsidisation of smaller players by larger licensees and the licensees’ use of the scheme to underwrite poor governance and worse commercial practices. Beyond licensees, could clients take more risk, confident that the CSLR provides them with guaranteed protection?

The best case scenario might be for a scheme funded, and maintained, by levies calculated by reference to:

• the nature, scale and complexity of the Licensees’ activities;
• the licensee’s solvency and retained capital;
• the number of the persons authorised by the Licensee;
• the ‘complexity’ of the advice and services offered by the Licensee;
• the maturity of the licensee’s risk and governance framework; and
• the licensee’s engagement of independent compliance reviews.

“Well I guess it ain’t easy doing nothing at all
But hey man free rides just don’t come along
Every day”

— “Why Don’t You Get a Job?”, The Offspring

What now?

It may be too late to make a formal submission (the invitation expired 7 February 2010) but it may not be too late to influence the development of the scheme. Read the proposal and consider whether, and to what extent, the cost of the proposed scheme will affect you and your business.

With the raft of proposed changes facing our industry, take the time to consider the Consultation Papers and their proposed solutions. If you don’t want to make your own submission, talk to us about supporting our submission – Assured Support has a broader perspective than most other businesses, an independent approach and the data to support our views.

We’d welcome your participation.