The Compensation Scheme of Last Resort (CSLR) could grant the Minister for Financial Services the ability to impose further industry levies if the regime does not have adequate legislative safeguards in place, according to Liberal Senator Andrew Bragg.
The legislation in its current form states the regime has a $20 million levy cap for each of the four subsectors (including one specifically for financial advice), which means if any subsector is required to pay in excess of that (up to $250 million, according to the legislation) during the financial year, the difference would be required to be funded at the minister’s discretion.
During hearings from the Senate Economics Committee on Friday morning, Bragg said the lack of specifics or limitations could set a dangerous precedent.
“If we grant a minister of the day this authority then they are going to be able to issue levies into the industry in order to pay for various things that happen,” Bragg said, during testimony from the Financial Services Council. “That would be granting god-like powers here to a minister.”
FSC executive director of policy and advocacy Spiro Premetis said the organisation agrees.
“We’ve put in a submission on the regulations that there could be more that could be done to make it clear how that discretion could be utilised,” Premetis said.
Line in the sand
While the FSC has remained steadfast in its recommendation that managed investment schemes (MISs) are not included in the regime, Bragg noted the public would still rely on the CSLR if an FSC member went insolvent or otherwise was unable to pay a determination.
The FSC membership is comprised of managed fund and life insurance product manufacturers, and Bragg spent seven years on the FSC’s policy team.
“When your members receive an AFCA determination and then they subsequently go out of business it’s in that circumstance that there would be the access to this scheme,” Bragg said.
The CSLR bill lapsed after the May Federal election was called in April. Before the election, Labor stated they would pass the bill even if MISs are not included, despite pushing for them to be included. Labor has reintroduced the bill since the election, but MISs are not included within the scope of the latest version.
Working hard or hardly working
Among the other issues Bragg queried was whether the CSLR may give the regulator incentive “to do less work than it is doing today”.
Premetis said there are three elements of moral hazard the scheme could create, not just with consumers taking fewer precautions and with parties committing fraud.
“There’s the moral hazard of the regulator that they might not do as an effective job of enforcement because they could just allow claims to go through to the scheme,” Premetis said.
Chair of the committee, Labor Senator Jess Walsh, referred to earlier comments made during testimony of the Australian Banking Association that referred to ASIC’s media announcement on Dixon Advisory victims using AFCA to make a pre-claim for the CSLR.
Walsh and Bragg asked the regulator if the implication from that announcement is the possibility they would be less likely to pursue regulatory actions if a CSLR came into place.
“That’s not correct,” ASIC senior executive leader Sarah Edmondson replied.
Bragg asked ASIC how moral hazard would be handled if ASIC was already telling people to seek redress from a scheme that is yet to commence.
Edmondson said the regulator was purely advising customers on potential options within the framework available.
“I’m not sure how the argument of moral hazard comes in when there is a specific framework that comes out to test whether consumers have a claim to loss in the first place,” she said.
Edmondson added that nothing about the CSLR will change how ASIC acts from a law enforcement perspective.
