On Wednesday, the government introduced Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023, the Financial Services Compensation Scheme of Last Resort Levy Bill 2023, and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2023 into the House of Representatives.
The bills implement the Compensation Scheme of Last Resort (CSLR) and the Financial Accountability Regime.
FPA chief executive Sarah Abode said while there are some positive aspects with the CSLR that’s been proposed, the association still has some reservations.
Ms Abood noted that an effective CSLR will promote trust in financial advice among consumers by ensuring that if retail consumers have lost money due to poor advice, there is a compensation mechanism available.
“However the legislation has not changed substantially from previous drafts, and many of the concerns we expressed previously remain,” she stated.
The scope of the scheme needs to be broader, she explained, to ensure that consumers are covered for the full range of matters considered by AFCA, including managed investment schemes.
“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’,” said Ms Abood.
“However this could take some time, while consumers remain unprotected from a major source of harm in the sector.”
Another area of concern, she said, 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,” said Ms Abood.
“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.”
Ms Abood said the association would also like to see the overdue review of professional indemnity insurance to be commenced.
“A properly functioning PI sector would substantially reduce the calls on a CSLR,” she noted.
The FPA has also outlined concerns about the cost of the scheme on its 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,” she said.
“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.”
Ms Abood said the FPA would continue to work constructively with the Government, advisers, consumers and other stakeholders to help ensure the scheme can operate effectively and that consumers can have trust in financial advice.
