MFAA sets out wishes for CSLR regime

Since February 2020, the Australian Financial Complaints Authority (AFCA) has emphasised the need for CSLR obligations to apply to a broad range of financial services providers, including mortgage brokers and finance brokers.

The objective of the CSLR is to provide compensation to eligible consumers where they have an AFCA determination in their favour and where the relevant financial firm has not paid the consumer in accordance with the determination.

The scheme facilitates the payment of up to $150,000 in compensation, with the former 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, and insurance product distribution.

To expedite the scheme, the government funded its establishment and contributed to covering costs in its first year, to allow the start of claims’ payments from 1 July 2022.

Following that date, the scheme was to be fully industry-funded through a levy on relevant financial services and credit licensees, it was announced.

On Tuesday (25 October), senators recommended that the scheme and the financial complaints authority (AFCA) face much stronger parliamentary scrutiny, and that the Senate should review the enforcement capability of ASIC and ways to manage the new moral hazard the scheme introduces.

For example, the report flagged that the CSLR “establishes an enormous moral hazard for consumers, the market and regulator”, given that they may diminish “primacy of personal accountability for financial misconduct”.

Senator Andrew Bragg added that the senators also recommended “statutory reporting obligations to ensure ASIC, the compensation scheme & the complaints authority cannot cover up law enforcement failures by levying the industry”.

Industry seeking a sensible approach to fees

Speaking to The Adviser after the release of the inquiry report, the Mortgage and Finance Association of Australia (MFAA) outlined its wishes for the scheme.

It has called on a review of the scheme within three years of its start.

No evidence of unpaid determinations from the mortgage broking sector gives rise to any associated industry levy to be low too, the MFAA told The Adviser, exclusively.

“We are deeply conscious of the impact of regulatory fees and levies on our small business members. The broking industry’s implementation of the best interest duty and other reforms over the last few years have seen consumer sentiment at an all-time high, complaints at an all-time low and an industry that continues to thrive,” explained MFAA head of policy and legal, Naveen Ahluwalia.

“Our cumulative advocacy on the ASIC Industry Funding Model (ASIC levy), which is currently under review, and the proposed CSLR levy is aimed at making sure that any regulatory costs levied on our small business members is directly proportionate to the low risk of consumer harm posed by our industry.

“With no evidence of unpaid determinations arising out of the mortgage broking industry — and the industry accounting for only 0.07 per cent of open AFCA consumer claims arising from insolvent firms — we expect the CSLR levy for our industry to be low.

“We would also hope there is no ‘ask’ from our industry to subsidise levies for claims made as a result of unpaid determinations arising out of other parts of the financial services industry.

“For this reason, we think it sensible there is a statutory review of the CSLR scheme within three years of its commencement.”

Concerns during the CSLR submissions

The MFAA has consistently highlighted its concerns to the Senate committee, namely that the implementation of the CSLR as a “consumer-protection mechanism” needs to be “balanced with the cost impact to small broking businesses.”

It has clarified it was pleased with key elements, including government funding CSLR establishment and costs in the first year, plus the 10 largest financial firms funding unpaid AFCA determinations and fees accumulated prior to its commencement.

“These measures will alleviate the cost burden on small businesses within the mortgage and finance broking sector,” the MFAA outlined.

Further MFAA concerns included:

• The ability of the scheme operator to raise an additional levy in a financial year
• The ability of the minister to raise sub-sector caps
• The ability of the minister to make additional midyear levies if required to fund claims, which includes the ability for the minister to increase scheme caps, as well as levy other sub-sectors to fund a sub-sector experiencing a shortfall
• The inclusion within the scheme funding for reimbursement of AFCA unpaid fees (rather than purely to remediate consumers for unpaid determinations), which may increase scheme costs

Additionally, it endorsed PwC review findings, resulting in AFCA’s implementation of a user-pays model, which would:

• Reduce the cost burden on smaller businesses (including those in the mortgage and finance broking industry) that are not heavy users of the scheme
• More closely link AFCA fees to use of AFCA’s service to reduce industry cross-subsidisation
• Link fees to service used to support dispute resolution processes and assist businesses with forecasting and budgeting

“We consider these same principles should be adopted in setting the scheme levy framework,” the MFAA explained.

[Related: Government introduces compensation scheme legislation]