Glossary
History of the Bills
There have been three legislative attempts to create a financial services Compensation Scheme of Last Resort (CSLR).
On 28 October 2021, the Morrison Government introduced the following three Bills to the Parliament:
The three 2021 Bills were intended to establish a CSLR, but they were not debated and lapsed at the dissolution of the 46th Parliament on 11 April 2022.[1]
On 8 September 2022, the Albanese Government introduced the following three Bills to establish a CSLR:
After the Bills were introduced, the Government identified some issues relating to specific policy measures in the CSLR.[2] The Government decided the CSLR component of those earlier Bills ‘was no longer fit for purpose’.[3] Consequently, the Government moved an amendment to the Financial Sector Reform Bill 2022 that removed the provisions that dealt with the establishment of the CSLR.[4] The Financial Sector Reform Bill 2022 was subsequently passed without the CSLR component and the other two Bills were not proceeded with.[5] Since then, further consultation has been undertaken with stakeholders to refine policy measures in the CSLR.
On 8 March 2023, the Government introduced the following three Bills in another attempt to establish a CSLR:
The 2023 Bills reflect the same intent and are drafted in almost identical terms as the legislation considered by the Parliament in 2022.[6] However, there are some minor and targeted changes to reflect the passage of time and stakeholders’ feedback.[7] A table that sets out the differences between the 2023 and 2022 Bills, provided by Treasury, is included in Annexure 1 of this Digest.
The Parliamentary Library prepared a FlagPost regarding the 2021 Bills and a Bills Digest that examined the 2022 Bills.[8] Most content in this Digest is sourced from that earlier work.
Purpose of the Bills
The purpose of the TLAB Bill is to establish the CSLR. To this end, the TLAB Bill inserts amendments to the Corporations Act 2001 to provide the Minister with the power to authorise an entity to operate the CSLR.[9] The entity will be known as the ‘CSLR Operator’ and it is proposed to be a subsidiary of the Australian Financial Complaints Authority (AFCA).[10] The CSLR Operator must operate on a not-for-profit basis.
The purpose of the Levy Bill and the Collection Bill is to support the CSLR by forming the levy framework to fund the CSLR.[11]
Background
What is the CSLR?
The CSLR is a proposed scheme that will provide compensation to eligible victims of financial misconduct who have not been paid, typically because the financial institution involved in the misconduct has become insolvent.
Who will be covered by the scheme?
As the name suggests, the CSLR will provide compensation to consumers as a last resort in specific circumstances—when the AFCA has made a determination in favour of the consumer who experienced financial misconduct, and the financial institution in dispute has not paid in accordance with the AFCA determination (typically because of insolvency).[12]
The proposed scheme is limited in its scope:
- the CSLR will only apply to unpaid AFCA determinations. Unpaid victims of financial misconduct as determined by court and tribunal rulings will not be covered by the CSLR
- the CSLR’s maximum compensation for each AFCA determination is capped at $150,000 (proposed section 1067 of the Corporations Act, at item 3 of Schedule 1 to the TLAB Bill)
- the CSLR will consider claims for unpaid AFCA determinations when the financial complaint is made to AFCA after 1 November 2018 (the date that AFCA commenced operations)
- the CSLR will provide compensation to unpaid consumers who experienced financial misconduct in relation to the following four types of financial products and services (proposed section 1065 of the Corporations Act, at item 3 of Schedule 1 to the TLAB Bill):
- personal advice on relevant financial products to retail clients[13]
- credit intermediation
- securities dealing for retail clients
- credit provision.
Assistant Treasurer Stephen Jones said:
The scope of the CSLR reflects financial products that have a history of unpaid determinations and have been subject to significant regulatory reform which have reduced the risk of misconduct.[14]
Why is there is a need for the CSLR?
The CSLR arose from the recommendations of the Review of the Financial System External Dispute Resolution and Complaints Framework (known as the ‘Ramsay Review’). The 2017 Supplementary Final Report to the Ramsay Review found that:
A well-functioning system for resolving disputes within the financial system is essential for safeguarding consumer trust and confidence and for ensuring the system is meeting the needs of its users…
There is, however, clear evidence that current arrangements are failing to meet this expectation, with some consumers and small businesses not receiving compensation that has been awarded by an EDR [external dispute resolution] body.
… the majority of financial firms comply with their legal obligations and compensate their customers where required. Nevertheless, the Panel also recognises that while unpaid determinations represent a very small proportion of total EDR determinations the impact on consumers and small businesses can be significant and can erode confidence in the dispute resolution processes and the financial system more broadly.[15]
Consequently, the Ramsay Review recommended that ‘a limited and carefully targeted CSLR be introduced for future unpaid compensation in parts of the financial services sector where there is evidence of a significant problem of compensation not being paid’.[16]
In December 2017, the Australian Government established the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (commonly known as the Banking Royal Commission or Hayne Royal Commission) to inquire into and report on misconduct in the financial services industry.
The Banking Royal Commission recommended that the three principal recommendations made in the Supplementary Final Report of the Ramsay Review should be carried into effect.[17]
Delegated legislation
The 2023 Bills provide power for the Minister to make Regulations about the CSLR. For example, details of the levy calculations will be prescribed in the Regulations (clause 8 of the Levy Bill). On 8 September 2022, the Government released an Exposure Draft of the Regulations as part of a consultation process.
Key issues and provisions
How will the CSLR be funded?
Annual levy
The proposed CSLR will be industry-funded.[18] In other words, when victims of financial misconduct are unpaid due to a financial institution’s insolvency, it is up to the rest of the financial services industry to meet the shortfall via an annual levy to fund the CSLR.
For the scheme’s first levy period, the Australian Government will provide funding to the CSLR operator to meet the initial estimate of claims, fees, and costs. From the second year onwards, the CSLR will be industry-funded.[19]
The Collection Bill will establish the power for the Australian Securities and Investments Commission (ASIC) to issue levy notices and collect levies from relevant financial firms for the purpose of funding the scheme (clauses 13 and 17 of the Collection Bill).
The annual levy will be payable by entities that provide financial products and services which are within the scope of the CSLR (that is, those products and services which are authorised to be provided by Australian financial services licence and Australian credit licence holders who are required by legislation to be AFCA members).
The annual levy that can be raised by the CSLR is subject to a cap of $250 million (subclause 17(1) of the Levy Bill). According to a CSLR proposal paper published by the Treasury in 2021:
The amount is considered high enough to fund claims for compensation in circumstances where there has been a large or ‘black swan’ event relating to a financial firm providing an in-scope financial product or service. Additionally, the amount is also considered low enough to support the sustainability of the scheme by limiting its potential yearly impact on leviable financial firms throughout the life of the scheme.[20]
The amount of levy that may be imposed in any particular sub-sector is capped at $20 million, or a higher amount prescribed in the Regulations (subclause 17(2) of the Levy Bill). The sub-sector cap is intended to provide assurance to sub‑sectors about the maximum amount expected to be levied against each sub-sector in a levy period, absent Ministerial involvement.[21]
Unlike the scheme levy cap of $250 million, it is possible for the sub-sector levy cap to be exceeded by a Ministerial determination imposing a special levy made under proposed section 1069H of the Corporations Act, at item 3 of Schedule 1 to the TLAB Bill (subclause 17(2) of the Levy Bill).
The CSLR levy framework will align with the ASIC industry funding model/cost recovery framework to ease the regulatory burden on the industry.[22]
One-off levy and special levy
In addition to the annual levy, a one-off levy will be imposed. The purpose of the one-off levy is to fund the backlog of accumulated unpaid claims (and AFCA’s unpaid fees) for complaints made to AFCA between 1 November 2018 and 7 September 2022.[23]
The one-off levy will be payable by the ten largest financial firms, excluding private health insurers and superannuation trustees (clause 10 of the Levy Bill). The top ten largest financial firms are determined by their total incomes for the 2021–22 income year.[24]
Unlike the annual levy, which is payable by all the members of one or more specified sub‑sectors, the one-off levy is only required to be paid by the top ten entities that meet the relevant criteria. These ten entities may be members of different sub-sectors.[25]
As discussed, the Minister has the power to impose a special levy to respond to unexpected events or cost outlays (proposed section 1069H of the Corporations Act, at item 3 of Schedule 1 to the TLAB Bill).
Committee consideration
Senate Economics Legislation Committee
At this stage it is not clear whether the 2023 Bills will be referred to the Senate Economics Legislation Committee for inquiry and report.
The Committee conducted an inquiry into the 2022 Bills (along with the Bills regarding a Financial Accountability Regime). On 24 October 2022, the Committee (chaired by Labor Senator Jess Walsh) tabled its report on the 2022 Bills and recommended the Bills be passed.[26]
Additional comments by Coalition Senators
Additional comments made by Coalition Senators criticised several aspects of the Government’s proposed CSLR. The Coalition Senators said the CSLR would establish ‘an enormous moral hazard for consumers, the market and regulator.’[27]
The Coalition Senators noted that several stakeholders in the financial services industry provided testimony of how the proposed CSLR would pose a ‘moral hazard’ problem. For instance, the Financial Services Council said:
I think there are a couple of moral hazards that come through the scheme, and I will just unpack that. The first one that comes to mind is consumers potentially not taking enough precautions to make sure that they’re dealing with a bona fide and reputable financial services provider and adviser. There’s the moral hazard of the parties that could conduct fraud. … there’s also the moral hazard that the regulator might not do as effective a job of enforcement, because of the fact that they could just allow claims to go through to the scheme.[28]
The Coalition Senators emphasised that the CSLR must be a last resort compensation for consumers, otherwise consumers could be incentivised to expose themselves to risk where they otherwise would not, and regulators could be incentivised to not adequately enforce the laws against financial misconduct, as they know victims of such misconduct would be compensated.[29]
In addition to the ‘moral hazard’ problem, the Coalition Senators noted that the Minister has considerable powers to issue special levies under the CSLR. This gives the Minister ‘very broad discretion to determine further levies upon industry to fund the scheme’.[30]
The Coalition Senators expressed concerns that it is unclear how this discretion is ‘sufficiently constrained’ in the legislation. Further the Senators recommended that constraints on the Minister’s discretion must be included in legislation and not left to the regulations.[31]
The Coalition Senators made three recommendations in relation to the CSLR:
- Recommendation 1 – the Australian Financial Complaints Authority along with the CSLR operator, should be required to face stronger Parliamentary scrutiny with the passage of these bills.
- Recommendation 2 – to ensure the CSLR is truly ‘last resort’, the Senate should inquire into the enforcement capacity and capability of ASIC, given the moral hazard that the CSLR poses for the financial regulator.
- Recommendation 3 – Consideration should be given to:
- amending the bill to limit Ministerial discretion on further and special levies and to provide clarity to the market
- a statutory reporting obligation to capture any communication between ASIC and the CSLR operator and AFCA to reduce moral hazard and ensure law enforcement remains ASIC’s key focus.[32]
Senate Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills has not yet considered the Bills.[33]
The Committee did not raise scrutiny concerns regarding the CSLR when it considered the 2022 Bills.[34]
Policy position of non-government parties
The policy position of the Coalition is reflected by the additional comments made by Coalition Senators in the Senate Economics Legislation Committee’s report, discussed above.
The Australian Greens did not make comments in relation to the CSLR.[35]
At the time of writing, the positions of other parties and Independents could not be identified.
Position of major interest groups
Financial industry associations
Several financial industry associations made submissions to the Senate Economics Legislation Committee regarding the 2022 Bills. In their submissions, they said they support a genuine compensation scheme of last resort to address unpaid AFCA determinations.[36]
In August 2021, eight financial industry associations issued a joint media release to oppose the proposed CSLR, claiming that the scheme will add unnecessary red tape and increase costs to the financial advice sector. The eight financial industry associations said:
The draft legislation establishes a CSLR operator as a subsidiary of AFCA. This adds unnecessary red tape by requiring the ASIC to administer invoices and payments and significantly increases the Governments [sic] administration costs of the financial advice sector with little benefit to consumers. ASIC fees for financial advisers have increased by more than 230 per cent over the past three years. Most financial advisers are sole traders or small businesses who cannot afford the rising costs associated with increased regulation…
Responsibility for consumer losses and complaints should be shared evenly across the sector. However, the proposed scheme does not apply to some industry participants, such as product manufacturers.[37] [emphasis added]
Consumer advocacy groups
Broadly speaking, consumer advocacy groups support the establishment of the CSLR.[38] However, they recommend the Government expand the scope of CSLR. Specifically, they believe a CSLR should:
- cover more financial products and services such as managed investment schemes and funeral expenses products
- cover victims of financial misconduct as determined by court and tribunal rulings; the groups argue ‘access to effective redress should not depend on which forum heard a consumer dispute’
- increase the proposed individual payment compensation cap of $150,000 because ‘this cap is too low for some people who have suffered losses from financial advice scandals’.[39]
Financial implications
The estimated financial costs of the CSLR are indicative and dependent on a number of key factors including the scheme commencement date and AFCA complaint consideration processes.[40] The estimated costs are:
| 2022–23 | 2023–24 | 2024–25 | 2025–26 |
|---|
| -$2.7 million | $0.5m | -$0.1 m | -$1.6m |
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.[41]
Parliamentary Joint Committee on Human Rights
At the time of writing, the Parliamentary Joint Committee on Human Rights has not yet considered the Bills. The Committee had no comments with respect to the 2022 Bills.[42]
Commencement date
The establishment of the CSLR and the supporting levy framework commences on the day after the Levy Bill receives Royal Assent.[43] The Collection Bill commences at the same time as the Levy Bill to ensure that all aspects of the levy framework start on the same day. If the Levy Bill does not commence, the other Bills do not commence.[44]
The CSLR operator can begin to make compensation payments to eligible consumers after the commencement of the first levy period.[45]
Concluding comments
If passed, the Bills would implement the recommendations of the Ramsay Review and the Banking Royal Commission for the establishment of a CSLR in Australia. There are divided opinions about the Government’s proposed CSLR, with some stakeholders raising concerns about specific aspects of the CSLR.[46]