Labor supports this bill however, Labor is concerned by the narrow focus of the proposed compensation scheme and the decision by the government to exclude manage investment schemes (MIS's) from coverage.
Labor would encourage the government to expand the scope of the proposed compensation scheme of last resort (CSLR) to include MIS's.
A number of witnesses suggested that the proposed scope of the compensation scheme was too narrow and would lead to poor outcomes. As suggested in the Senate References Committee inquiry into the Sterling Income Trust (SIT):
Consumers who have invested in products outside of these provisions, such as managed investment schemes, will not be protected by, or able to access compensation from, the proposed CSLR. As a result, victims of the collapsed Sterling Group and the SIT are unlikely to be assisted by the CSLR scheme if it is legislated as proposed.
A number of witnesses highlighted how narrow the legislation is in relation to CSLR such as Mr Alan Kirkland from Choice saying:
… what's proposed in the bill is pretty narrow. It doesn't go very far beyond financial advice. So we've got lower compensation caps, court decisions excluded and pretty narrow coverage, contrary to what the government had committed to deliver.
Mr Brad Vermeer from Financial Planning Association of Australia (FPA) reiterated that point by saying
… we believe that the legislation introduced to establish such a scheme is too narrow in scope, provides inadequate coverage to consumers and does not seek to address some of the underlying causes of unpaid determinations such as strict enforcement and appropriate professional indemnity insurance.
Mr Peter Burgess from the Self-Managed Super Fund Association (SMSF Association) said that:
The SMSF Association supports measures which strengthen consumer protection. We have been a long-term advocate of the need for a compensation scheme of last resort for the financial services sector and we are pleased to see legislation to give effect to such a scheme now before the parliament. However, it is critically important that the scheme is a genuine compensation scheme of last resort and, to ensure the sustainability of scheme funding and the confidence of consumers, it is broad based.
The committee head further evidence from Mr Burgess who suggested that if MIS's are included in the CSLR, there would be fewer losses and increased avenues to compensation:
I think that if they are included we're less likely, of course, to see situations like that of Trio, where clients who suffered substantial losses have had no avenue for compensation. Including managed investment schemes, in our view, should improve confidence in the overall financial sector, and we think that's an important objective of the last resort compensation scheme itself.
When asked if it was fair to exclude the MIS's, Mr Vermeer suggested:
I also think it comes down to what the reasonable expectation of the unity and consumers is as far as the breadth of a compensation scheme of last resort and who would have access to compensation in the case of found misconduct. From that perspective, we believe that managed investment schemes should be included to ensure that consumers are adequately protected.
Mr Kirkland suggested it would assist a number of victims who were impacted by the Sterling First collapse.
It would assist many of the victims of Sterling First, but I think that, in a way, the Sterling First example probably highlights the way in which this scheme would also be tightly constrained—contrary to some of the criticisms of it—because, if we look at the matters that went to [Australian Financial Complaints Authority] AFCA before AFCA stopped hearing claims in relation to Sterling, there were some where AFCA found that in fact there was a claim for compensation against the managed investment scheme and some where it didn't. So, it turns on the particular circumstances, but certainly a large number of those victims of the Sterling First collapse would have access to compensation if managed investment schemes were included in the compensation scheme.
Labor Senators recommend that the Australian Government expand the scope of the Compensation Scheme of Last Resort to include managed investment schemes.
Senator Anthony ChisholmSenator Jess Walsh
Deputy ChairMember
Labor Senator for QueenslandLabor Senator for Victoria