Three-quarters of financial advisers will have to fund the cost of the government’s proposed Compensation Scheme of Last Resort (CLSR) and the range of products included is too narrow, according to the Association of Financial Advisers (AFA).
While the AFA agreed to the introduction of CSLR, it said this support was on the basis that it would be broadly based and that financial advisers would not be expected to pick up the cost of product failures.
However, the association had found that this was not the case after it analysed the government’s proposal paper of the scheme.
The association said the scheme had the following features:
- The range of included products and services is very narrow, including financial advisers, credit providers, credit intermediaries, insurance distributors, and securities dealers. Some members will fit into multiple categories;
- Deposit products, superannuation funds and managed investment schemes have been excluded;
- Financial advice will seemingly be expected to pick up three-quarters of the cost of this scheme;
- There will be a cap of $150,000 on individual payments;
- The annual administration costs of running the scheme are estimated to be at least $3.7 million, which is on top of establishment costs ($6.3 million) and the creation of a capital reserve fund ($5 million);
- Unpaid determinations from the commencement of the Australian Financial Complaints Authority (AFCA) (November 2018) through to the start of the scheme, will be picked up by the 10 largest financial institutions; and
- There will be a minimum levy threshold of $1,000, meaning that very small licensees will not be expected to pay.
“We are very concerned about the cost of this new scheme and the potential risk in the event of a black swan product failure,” the AFA said.
“There are a range of caps, and controls around secondary levies, however the overall annual cap is $250 million.”