Australia to establish financial services compensation scheme of last resort

The Australian Government has published its proposals for establishing a financial services compensation scheme of last resort (CSLR).

The CSLR will provide limited compensation where a determination issued by the Australian Financial Complaints Authority (AFCA) remains unpaid and the determination relates to a financial product or service within the scope of the scheme.

The Government has committed to establishing a CSLR that provides coverage beyond the provision of personal financial advice failures, as recommended by the Ramsay Review. Accordingly, it is proposed that the CSLR will encompass five financial products and services, as follows:

• personal advice on relevant financial products to retail clients;
• credit intermediation;
• securities dealing;
• credit provision; and
• insurance product distribution.

The financial products and services covered by the CSLR are proposed to be defined by reference to the financial product or service that a firm is licenced to provide through an Australian financial service licence (AFSL) or an Australian credit licence (ACL).

For a CSLR claim to be eligible to receive compensation, the AFCA determination must be in scope, AFCA must have been notified within 12 months that the member has not complied with the AFCA determination so AFCA can conduct reasonable steps to secure payment, the member must be unable to pay the compensation owed, and there must not be any other statutory compensation scheme available.

The scheme’s legislation sets out the maximum compensation that can be paid through the CSLR. The $150,000 compensation cap balances the provision of compensation to claimants and scheme sustainability for those financial firms that are not responsible for the misconduct giving rise to the compensation being claimed but are nonetheless being required to pay for it.

The maximum compensation for each AFCA determination is proposed to be $150,000. The maximum compensation amount for the CSLR broadly aligns with the United Kingdom’s Financial Services Compensation Scheme’s maximum of £85,000.

The compensation cap is proposed to apply to all CSLR claims for compensation from individuals and small businesses (including primary producers) regardless of the financial product or service to which the AFCA determination relates. The CSLR will pay compensation consistent with the terms of the AFCA determination, including for any direct financial loss, indirect financial loss, non-financial loss, interest payments, and any legal or professional costs awarded by AFCA, up to the proposed $150,000 compensation cap.

No interest is proposed to be applied by the CSLR over and above any interest provided for in an AFCA determination because, in the majority of CSLR claims, it is expected that compensation will be payable within a reasonable period from when the AFCA determination is made.

Submissions in response to this proposal paper should be provided by close of business 13 August 2021, electronically or by post. While submissions may be lodged electronically or by post, electronic lodgement via email to [email protected] is preferred.