Key points
- The Bills propose to establish a Compensation Scheme of Last Resort (CSLR) that will provide compensation to victims of financial misconduct who have received a determination in their favour from the Australian Financial Complaints Authority but have not been paid, typically because the financial institution involved in the misconduct has become insolvent.
- The CSLR arose from recommendations of the Ramsay Review and the Banking Royal Commission.
- There are divided opinions about the Government’s proposed CSLR. While broadly supporting the CSLR, consumer advocacy groups have argued for the scheme to be broadened and for the monetary cap to be increased. On the other hand, financial industry associations oppose the CSLR because they believe the scheme will add unnecessary red tape and cost to the industry.
- Both the Morrison Government and the Albanese Government made previous attempts to pass legislation to establish the CSLR. The Bills introduced by the Morrison Government lapsed at dissolution of the 46th Parliament and the previous Bills introduced by the Albanese Government in September 2022 have been replaced with the current Bills.
Introductory Info
Date introduced: 8 March 2023
House: House of Representatives
Portfolio: Treasury
Commencement: As set out in the body of this Bills Digest.
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]
Annexure 1:
Amendments reflected in legislation reintroduced in 2023—information provided
by Treasury
| Measure[47] |
As Introduced in September 2022 |
As reintroduced in March 2023 |
| One-off Levy –cohort
of levy payers |
The ten-largest banks
and insurers with total incomes greater than $6 billion in 2019-20
will be required to pay a one-off levy to cover pre-CSLR claims (the backlog)
in proportion to their total income in 2019-20. |
The ten-largest banks
and insurers as measured by their 2021-22 total income (as reported to
the Commissioner of Taxation), will be required to pay a one-off levy to
cover pre-CSLR claims (the backlog of accumulated complaints) in proportion
to their total income in 2021‑22. |
| One-off
Levy – payment in instalments |
Financial
firms must pay their one-off levy in a single, lump sum payment. |
Financial
firms will have the option of paying their one-off levy in two equal
instalments, paid across the first two levy periods. |
| Backlog cut-off date – ‘accumulation recovery day’ |
‘Accumulation recovery
day’ is defined as the day the Bill for the Financial Sector Reform Act
2022 was introduced into the House of Representatives. Complaints made to
AFCA before that day will form part of the backlog of accumulated complaints. As the Bill was
introduced into the House on 8 September 2022, the backlog cut-off date is 7
September 2022. |
The
‘accumulation recovery day’ is defined as 8 September 2022, maintaining the
backlog cut-off date as 7 September 2022. |
| Annual
Levy – Duration of the first levy period |
Levy period means a
financial year starting on or after
1 July 2023. The duration of each levy period is 12 months (from 1 July
to 30 June of the following year). |
The first
levy period is to begin on a day to be determined by the responsible Minister
(via a notifiable instrument) and end on 30 June 2024. |
| One-off
Levy – expand the ability to collect any backlog shortfall from the annual
levy |
Should
collections of the one-off levy be insufficient to fund the backlog of
pre-CSLR claims, the shortfall may be collected as part of the annual levy
for only the second levy period in 2024-25 (not subsequent levy periods). |
Should
collections of the one-off levy be insufficient to fund the backlog of
pre-CSLR claims, the shortfall may be collected as part of the annual levy
for the second (2024-25), third (2025-26) and fourth (2026-27) levy periods. |
| Levy
Notices – ASIC default notices power |
ASIC does
not have the ability to issue a levy notice to a leviable entity where the
leviable entity does not comply with the CSLR information reporting
requirements. |
ASIC has
the ability to issue default levy notices even where the leviable entity
fails to provide information (or where the information provided is not
adequate). This replicates an equivalent power available to ASIC under the
ASIC Industry Funding Model (IFM) levy framework. |
| AFCA Cost Recovery – ensure full recovery of CSLR costs
by AFCA |
AFCA may be prevented
from fully recovering all the costs that they incur in assessing complaints
potentially eligible to claim against the CSLR because the legislation does
not allow for the recovery of AFCA’s “user charge” which may be charged
monthly, quarterly, or annually. |
The
definitions of “AFCA unpaid fees” and “AFCA accumulated unpaid fees” have
been amended to enable the full recovery of fees and costs incurred under
AFCA’s new funding model (that is, to cover both the “user charge” and the
“complaint fee”) and to provide flexibility to cover potential future funding
models. |
| In Scope
Entities – ensure
entities that are deregistered (i.e. no longer exist) or are no longer AFCA
members at the time the determination is made are covered under the CSLR
scheme |
There may have been
uncertainty over whether entities that are deregistered, have ceased to
exist, or are no longer AFCA members at the time the determination was/is
made were within scope of the CSLR. |
Clarifying
amendments were made to ensure the intended operation of the CSLR i.e., that
all AFCA determinations relating to a product and/or service that is within
scope of the CSLR, including those made against deregistered companies, are
eligible for compensation under CSLR. |