Treasury has released for public consultation a proposals paper and exposure draft legislation that would establish an industry-funded 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.
Legislation establishing the CSLR will be introduced during the 2021 Spring sittings with further consultations to be undertaken in relation to regulations and other aspects of the scheme design
It is expected that legislation and regulations to be passed and enacted by the first quarter of 2022.
The draft legislation contains the key features of the scheme, including the ability to authorise an operator of the scheme, eligibility requirements, compensation available for each eligible AFCA determination, the levying framework to fund the scheme, and the governance of the scheme.
Financial products or services in-scope
The CSLR will consider claims for unpaid AFCA determinations where a complaint was made to AFCA from 1 November 2018 and the determination is in relation to a financial product or service within the scheme’s scope.
It is proposed that the CSLR will encompass the following five financial products and services:
- personal advice on relevant financial products to retail clients;
- credit intermediation;
- securities dealing;
- credit provision; and
- insurance product distribution.
While credit activities undertaken by credit representatives are within the scope of the CSLR, credit representatives will not fund the CSLR as their authorising Australian credit licensees are liable for their activities.
The financial products and services that are in-scope for the CSLR are those that are authorised to be provided by AFSL and ACL holders that are required by legislation to be AFCA members.
Court and tribunal decisions will also be out of scope of the CSLR at the commencement of the scheme.
Eligibility for CSLR payment
Legislation and regulations will outline the eligibility criteria to claim compensation from the CSLR.
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 maximum compensation for each AFCA determination is proposed to be $150,000.
Power to issue levy notices and collect levies
The primary legislation will establish the power for ASIC to issue levy notices and collect levies from
relevant financial firms for the purpose of funding the scheme. A power will be conferred onto the
CSLR operator to make at least an annual determination of an amount to be levied to fund the
scheme, including the amount to be collected from relevant subsectors.
The primary legislation will prescribe a scheme cap of $250 million. The scheme cap prescribes the absolute maximum amount which may be levied from leviable financial firms under the scheme in any one year.
Only leviable firms whose levy in relation to each in-scope financial product or service is above a minimum levy threshold will be required to fund the scheme. The minimum levy threshold is to be prescribed in regulations and is proposed to be $1,000. The levies that would have been paid by the leviable firms whose levy is below the $1,000 minimum levy threshold will be re-allocated to firms whose levies are above the threshold.
ASIC will have the power to suspend or cancel a licensee’s licence if the CSLR pays compensation that the licensee was otherwise obliged to pay or the licensee does pay required CSLR levies after 2 months.
ASIC will also have the power to deregister a company if the company does not pay the levies required under the CSLR, in conjunction with any associated costs, 12 months after the initial due date.
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Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.