Last week the government tabled the Financial Services Compensation Scheme of Last Resort Levy Bill 2022, which sets out the details for the Compensation Scheme of Last Resort (CSLR).
The CSLR provides a level of compensation for victims of unpaid Australian Financial Complaints Authority (AFCA) determinations.
The SMSF Association has welcomed the CSLR, with the scheme providing an important new layer of consumer protection.
SMSF Association chief executive John Maroney said the association has consistently supported measures seeking to improve consumer protections.
“However, the decision to exclude Managed Investment Schemes (MIS) from the CSLR is a concern. Historically, these failed schemes have had an enormous financial impact on those consumers caught up in them, including SMSFs.”
“The financial devastation they can cause to unwitting consumers was well documented in a Senate Inquiry in late 2021 that examined the Sterling Income Trust collapse. Most of the victims were elderly Australians, yet under this proposed compensation scheme they will be excluded.”
Mr Maroney said the CSLR would also exclude consumers from First Nations communities who lost thousands of dollars invested in funeral insurance policies after the collapse of the Aboriginal Community Benefit Fund.
“Further back, the collapse of Trio Capital in 2009 saw a Parliamentary Joint Committee Inquiry held to examine it as well as other related matters. With all the issues the common thread was a lack of consumer protections that were highlighted by our association and other organisations.”
The collapse of Trio Capital, which was a responsible entity for 28 managed investment schemes, saw SMSF members lost considerable amounts of money due to the fraudulent activities of the scheme operator, said Mr Maroney.
“Exposure to fraud resulted in significant losses for direct investors and superannuation funds. The superannuation funds involved included both large APRA funds and SMSFs. In total, 415 direct investors and 285 SMSFs had no access to compensation.”
Mr Maroney noted that the Financial Services Royal Commission made a wide-ranging compensation scheme one of its key recommendations.
“But the compensation scheme outlined in these four pieces of legislation does not incorporate the spirit or intent of the Royal Commission’s recommendation, and, as such, is failing the ordinary Australians who fall victim to failed MIS.
“We urge the government to revisit the legislation with the aim to expand its scope so that MIS victims are included.”
The FPA has similarly criticised the exclusion of managed investment schemes from the CSLR.
“While it was in Opposition, Labor suggested amendments which would at least include MISs in the CSLR, and it is disappointing that these changes have not been included in the bill,” said FPA chief executive Sarah Abood.
Ms Abood pointed out that in the case of the Dixon Group, where consumer harms are the result of product failure, those investors would not receive compensation under the current design of the scheme.
By including MIS victims in the scope, does this mean that MIS providers will also contribute to the CSLR , or is this just another expense that Financial Advisers will be expected to carry?