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The government has introduced legislation that represents the final tranche to implement recommendations made by the banking royal commission.
The Morrison government has announced that it has introduced legislation into Parliament to establish the compensation scheme of last resort (CSLR) and the Financial Accountability Regime (FAR).
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With this legislation, a further six recommendations made by the banking, superannuation and financial services royal commission to the government have been implemented.
Purpose of CSLR
The main objective of the proposed CSLR is to provide compensation to eligible consumers when they receive a determination from the Australian Financial Complaints Authority (AFCA) that is in their favour where the financial firm has not paid the consumer in accordance with the determination.
The CSLR will create a pool of funds from which eligible claimants who have suffered loss or damage as a result of inappropriate action of a financial firm can access compensation even if, for instance, the financial firm has become insolvent.
The scheme will facilitate the payment of up to $150,000 in compensation, with the government proposing that the CSLR would cover five financial products and services, including:
- Personal advice on relevant financial products to retail clients
- Credit intermediation
- Securities dealing
- Credit provision
- Insurance product distribution
The CSLR will be administered by the operator, which is a company that meets the operator requirements and is authorised by the Treasurer.
While credit activities carried out by credit representatives are within the scope of the CSLR, credit representatives will not fund it as their authorised credit licensees are liable for their activities.
The primary legislation for the CSLR will confer a power to make regulation to prescribe which financial products and services are within scope for the scheme.
To allow the scheme to commence as quickly as possible, the government will fund its establishment and contribute to scheme costs in the first year. This will allow the scheme to start paying claims from 1 July 2022.
Going forward, the scheme will be fully industry-funded through a levy on relevant financial services and credit licensees.
The Treasury has provided an example of how the levy might apply to mortgage brokers, based on the assumption that there are almost 37,000 representatives working for 1,398 credit intermediary licensees with compulsory AFCA membership in the credit intermediary subsector.
The levy calculation methodology in the proposal paper shows that every leviable credit intermediary licensee with 37 or more representatives would be calculated to incur a levy of at least $1,000.
In addition, the government will also consult on proposals to enhance the effectiveness of professional indemnity insurance in responding to compensation claims to ensure that the CSLR truly operates as a scheme of last resort.
It added that it will continue to consult on the legislation as part of committee processes as it proceeds through the Parliament.
The draft legislation around the CSLR (which was open for consultation until 13 August) outlined 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.
The financial products and services that are in scope for the CSLR are the same as those that are authorised to be provided by AFSL and ACL holders who are required, by law, to be AFCA members.
AFCA has previously stressed the need for CSLR obligations to apply to everyone across the financial services industry, including mortgage brokers.
It argued that unpaid determinations have extended beyond those who provide financial advice to include mortgage and finance brokers, credit providers, managed investment scheme operators, securities dealers and derivatives dealers.
Financial Accountability Regime
The FAR extends the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities and provides for joint administration between the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).
The FAR will apply to the banking sector after 1 July 2022 or six months after the commencement of the legislation, and after 1 July 2023 or 18 months after commencement of the legislation for the insurance and superannuation sectors.
The framework is aimed at ensuring that directors and senior executives are held accountable for their decisions and conduct.
Several reviews to be conducted in 2022
Commenting on the introduction of the legislation in a joint statement, Treasurer Josh Frydenberg and the Minister for Superannuation, Financial Services, and the Digital Economy, senator Jane Hume, said: “Despite the significant challenges posed by COVID‑19, through the introduction of this legislation, the Government has now met the legislative commitments it outlined in its roadmap for the implementation of the Hayne Royal Commission.
“This is a significant milestone that provides consumers of financial services with greater confidence in Australia’s financial system.
“The government has now met the legislative commitments it outlined in its roadmap for the implementation of the Hayne Royal Commission. Remaining recommendations, which include conducting several reviews in 2022 (including the remuneration review for brokers), will be implemented consistent with our prior commitments.”
[Related: Government releases new compensation legislation for consultation]
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