The Morrison Government has come under intense pressure from consumer advocates and professional associations to review the design and coverage of its proposed compensation scheme of last resort for financial victims.
Draft legislation for the scheme released by Treasury in July has disappointed consumer groups who had expected it to more closely reflect the recommendations of the Hayne Royal Commission and the 2018 Ramsay Review that examined dispute resolution in the financial services industry.
The last resort scheme is intended to cover unpaid compensation to consumers who receive favourable determinations from a court or the Australian Financial Complaints Authority for claims against service providers that become insolvent.
In the government’s policy response to the royal commission in February 2019, Treasurer Josh Frydenberg promised the scheme would be implemented in line with the recommendations of the Ramsay Review that commissioner Hayne supported.
The Ramsay Review advised the government to set the last resort scheme’s compensation cap for consumer claims in line with AFCA’s A$500,000 limit.
However, the scheme proposed by the government would cap compensation payouts at only $150,000 – less than one third of the AFCA cap.
Some product segments of the financial services industry will also be excluded from the last resort scheme including funeral insurance and managed investment schemes.
The modest compensation cap and narrow jurisdiction of the scheme has angered not only the country’s peak consumer advocate CHOICE but also a swathe of professional bodies including the Financial Planning Association of Australia, the Self-Managed Superannuation Funds Association and the country’s leading accounting bodies.
“The government’s proposal will exclude victims of managed investment scheme collapses, like the many elderly Australians who lost their savings through the collapse of Sterling First,” said CHOICE chief executive, Alan Kirkland.
“It will also exclude consumers from First Nations communities who were tricked into paying for funeral expenses policies by the Aboriginal Community Benefit Fund, now trading as Youpla.
“The government’s proposal fails to live up to the spirit and letter of the Royal Commission’s recommendations.”
Both commissioner Hayne and the Ramsay Review highlighted the need for the last resort scheme to deliver compensation to consumers in those parts of the industry where there was “clear evidence of recurrent problems with uncompensated losses”.
The government is yet to explain how its exclusion of managed investment schemes and funeral insurance policies is consistent with Hayne and Ramsay’s recommendations.
FPA chief executive Dante De Gori said consumers deserved the same protections and access to compensation, regardless of where they make their purchase.
“A last resort compensation scheme must operate equally and fairly across the entire sector to ensure consumers have faith in the system,” De Gori said.
“The government must ensure that those product manufacturers who profit from consumers’ investments, also contribute to compensation.”
Given the wide-ranging opposition to the scheme in its current form, consumer groups are concerned that the legislation could be stalled in the upper house until after the next federal election.
That will depend on the attitude of cross-bench senators including One Nation leader, Pauline Hanson.
So far, Ms Hanson has not indicated whether she will support the government’s legislation without requesting amendments.
The Ramsay Review concluded it was “particularly important” that the compensation caps of the last resort scheme be aligned with AFCA’s limits.
“In balancing these interests, and applying the Review Principles, the Panel considers
that a CSLR should have a compensation cap and it should be aligned with AFCA’s
compensation cap,” the Ramsay panel found.
“This is particularly important where a CSLR has jurisdiction to receive claims from consumers and small business that have a court judgement or tribunal award.”