While acknowledging the importance of an effective compensation scheme, the Financial Planning Association of Australia (FPA) has voiced concerns around the proposed Compensation Scheme of Last Resort (CSLR) and the Financial Accountability Regime (FAR) Legislation introduced into Parliament.
The CSLR was previously part of the Credit Act but was removed at the end of last year. It had since been re-introduced to the House of Representatives under the Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023.
According to FPA chief executive Sarah Abood, an effective CSLR would promote consumer trust in financial advice knowing a compensation mechanism existed in the event of bad advice, however the legislation has not changed substantially from previous drafts, which the FPA had spoken out about.
In its 2023-24 pre-Budget submission, the organisation had recommended expanding the scope of the scheme as well as looking into the costs the scheme would impose on the advice industry.
“Firstly we believe the scope of the scheme needs to be broader, to ensure that consumers are covered for the full range of matters considered by the Australian Financial Complaints Authority (AFCA), including managed investment schemes (MIS),” Abood explained.
“We acknowledge that a review into the regulatory structure of MISs has been announced, and this is a positive step. We are particularly pleased that this review will include a look at the thresholds that determine whether an investor can be treated as ‘wholesale’ or ‘sophisticated’.
“However this could take some time, while consumers remain unprotected from a major source of harm in the sector.”
She continued, “Another area of concern remains the ‘moral hazard’ in the complying, efficiently run businesses in our sector effectively having to underwrite the bad actors.
“We need to ensure there are strong disincentives for companies and their directors to resort to the scheme – otherwise we risk groups allowing their advice entities to go bankrupt (and the profession wearing the costs of consumer compensation), while the group and its directors continue their other profitable activities unscathed.
“The proposed remedy of cancelling the AFSL of a defaulting entity is little disincentive if it has already been made bankrupt. We would like to see enduring penalties for the related parties, directors and Responsible Managers of the entities resorting to the scheme.
“We are also keen for the overdue review of professional indemnity insurance to be commenced. A properly functioning PI sector would substantially reduce the calls on a CSLR.”
In its pre-Budget submission, the FPA had noted the proposed model left financial planners to pay more than 75% of the cost of the scheme (which would include the establishment, administration and capital reserve costs).
It had estimated administration costs alone would amount to $3.7 million per annum and put forward that the costs of establishment and any legacy claims relating to the proposed CSLR should be borne by the Government.
Abood said, “We are concerned about the costs this scheme will impose on our members. We’re very pleased to see that advisers will not be asked to fund compensation for past misdeeds at the outset – however the proposed sector cap of $20m could see levies in the future of over $1,250 per adviser at our current numbers.
“This is a significant impost on advisers who already face increased costs from the unfrozen ASIC levy, PI premiums and the general increased costs all businesses are facing in the current high inflation environment.”
The organisation would continue to constructively work with the government, advisers, and other stakeholders, she affirmed, to ensure the best path forward for an effective scheme to build consumer trust.
