The government has passed CSLR legislation for which it will cover expenses for the next financial year, but the future cost to advisers is yet to be known.
The CSLR will facilitate compensation of up to $150,000 to consumers who have an unpaid determination from AFCA under four different sectors: personal financial advice to retail clients, securities dealing for retail clients, providing credit, and arranging credit.
Consumers will be able to lodge claims for compensation from April 2024, with the first compensation payments to follow shortly thereafter.
The government will fund the body to establish the CSLR and first levy through to the end of FY24, but the scheme will be funded by the industry after that at the minister’s discretion.
There is a sector levy cap of $20 million included in the legislation, but a July 2021 consultation paper from Treasury estimated the ongoing levy would be $6.17 million a year, four years after the system was implemented.
In year one, the total levy would be $12.27 million (including capital reservice and establishment costs), which will be covered by the government, while year two and three will be $7.48 million which includes further capital reserve contributions.
The industry-pays model had been the contentious part of the legislation, with several parties like the Financial Services Council and Stockbrokers and Investment Advisers Association arguing the scheme doesn’t relate to misconduct in their areas.
In a media release on Thursday, the Minister for Financial Services Stephen Jones said this is a significant victory for over 2000 people who have been waiting for a resolution to their cases.
“The successful implementation of the CSLR will further strengthen consumer trust and confidence in Australia’s financial system,” he said.
However, Financial Advice Association CEO Sarah Abood said there are concerns the running costs of the scheme may become onerous for advisers.
“There are estimates as high as $1250 per adviser if the sector cap of $20 million were to be reached,” Abood said in a media release on Friday afternoon.
However, she noted the expected amount will be closer to $375 per adviser, based on the $6 million a year Treasury estimate.
“We really will need to keep any eye on those running costs and ensure they are reasonable,” Abood said.
Floodgate opened
In a statement online, AFCA acknowledged the passing of the bill and said complainants do not need to do anything in the meantime and will be contacted in due course.
“As an independent and impartial ombudsman service, AFCA will now review the status of complaints it has had on pause because of firm insolvency,” AFCA said.
“There are nearly 5,000 complaints currently on pause at AFCA, so this review will take some time to complete.”
AFCA had paused complaints against insolvent financial firms in 2020 while waiting for finalization of the scheme.
As of the start of June, there are 4,875 outstanding paused complaints under review covering all sectors.
Outstanding advice claims are over 2000 of which over 1800 are related to Dixon Advisory.
ASIC wrote to Dixon clients to encourage them to register complaints with AFCA if they wanted to be eligible for remediation through the CSLR.
The regulator did so because complaints can only be made against firms that are AFCA members, and victims would not be able to make a claim once Dixon’s membership ceases.
A long, strange journey
The CSLR is one of the final recommendations from the Hayne Royal Commission, which was initially pitched in the 2017 final report of the Ramsey Review.
The eponymous lead of royal commission, Kenneth Hayne, recommended the CSLR should initially be restricted to financial advisers but could be expanded to other services and have a compensation cap.
Additionally, it was meant to be as a last resort which meant all other dispute resolution channels had been exhausted.
Although the bill had bipartisan support before and after the 2022 election, the Coalition struggled to gain passage of the bill while Labor held out to include Managed Investment Schemes in the purview of the scheme.
However, introduction of the bill after the election didn’t include MISs, but the government did include an allocation to its first budget last October to a MIS review.
