Labor has recommended Managed Investment Schemes (MISs) be included in the Compensation Scheme of Last Resort (CSLR) as it claims the current scope is too narrow and will lead to poor consumer outcomes.
Their support of the proposal puts them inline with the 15 consumer groups and professional bodies that banded together to campaign on the issue.
Labor senators Anthony Chisholm and Jess Walsh said consumers will be worse off if MISs are excluded from the scope of the scheme.
“Labor supports this bill, however Labor is concerned by the narrow focus of the proposed compensation scheme and the decision by the government to exclude MISs from coverage,” Chisolm and Walsh stated in a report tabled Tuesday.
The Labor party members pointed to testimony in the Sterling Income Trust (SIT) hearings where victims of the scheme were left uncompensated after it collapsed.
“Consumers who have invested in products outside of these provisions, such as Managed Investment Schemes, will not be protected by, or able to access compensation from, the proposed CSLR,” the testimony said.
“As a result, victims of the collapsed Sterling Group and the SIT are unlikely to be assisted by the CSLR scheme if it is legislated as proposed.”
However, the Coalition continued to stand their ground with Senator Andrew Bragg saying any participation in MISs is part of investment risk.
“To push these risks onto the wider sector would extend the exposure of risk to the wider financial sector, while insulating the responsible parties from accountability,” Bragg said.
“De-risking investment activity would have a distortionary effect on financial markets, undermining the integrity of the financial system as a whole.”
The Government pointed to evidence from the Ramsey Review which found the precursor to AFCA, the Financial Ombudsman Service, had 92 per cent of unpaid determinations come from the financial advice sector.
“For this reason, the CSLR will not include managed investment schemes, and primarily cover personal advice – with a few extensions to other ‘advice-like’ areas, for example mortgage brokers,” Hume said last September on the matter.
The Ramsay Review’s final report was published in 2017 using data from 2016 – before the Hayne royal commision.
On Wednesday’s senate report, Bragg – a former head of policy for the Financial Services Council – said the CSLR should not be expanded and the government can’t “legislate away risk, nor should it”.
“Certainly, we should be clear in all public communication that the scheme is extremely limited,” Bragg said.
“I also note the real personal cost of bad financial advice but further note that there have been enormous reforms of the sector during the last decade which have radically changed the sector.”
However, in testimony during the CSLR inquiry it was noted by Association of Financial Advisers chief executive Phil Anderson that the expansion to include MISs would only be to cover misconduct, not poor investment performance.
“We need to be very aware when consumers are making investment decisions,” Anderson said. “They need to do that fully-informed and prepared to accept that sometimes investments do not perform as they had hoped, so this scheme is not to cover investment losses.”
