The compensation cap for the planned compensation scheme of last resort will be well short of the limits that currently apply under Australian Financial Complaints Authority rules.
Another controversial aspect of the proposed scheme is that court and tribunal rulings will be outside its scope.
On Friday, the government released draft legislation for consultation. The compensation scheme of last resort will consider claims for unpaid Australian Financial Complaints Authority determinations, where the complaint was made after 1 November 2018.
Financial ombudsman services, community legal groups and consumer groups have been calling for the establishment of such a scheme for years but the government’s proposed scheme may not be what they have in mind.
The decision to leave court and tribunal decisions out of scope is contrary to the recommendation of the 2017 Ramsay Review, which was endorsed by the Hayne royal commission.
A proposal paper accompanying the draft bill says this is an issue that could be reviewed in future
Financial products and services within the scheme’s scope will include personal advice on financial products to retail clients; credit intermediation, securities dealing, credit provision and insurance product distribution.
Specific products and services are those that financial institutions with an Australian financial services licences or an Australian credit licence are authorised to provide and where they are required to be AFCA members.
Products and services provided by voluntary AFCA members will not be covered.
In 2016, the Financial Ombudsman Service reported that 32 financial services providers had failed to pay compensation since 2010, with an outstanding value of A$12.6 million.
For a claim to be paid, AFCA must have been notified within 12 months that the company has not complied with a determination. In addition, the company must be unable to pay the compensation owed.
Compensation will be capped at $150,000, compared with AFCA’s compensation limits of more than $2 million for some credit products and $271,000 for claims against insurance brokers.
A paper accompanying the draft bill says: “The compensation cap balances the provision of compensation to claimants and the scheme sustainability for those financial firms that are not responsible for the misconduct giving rise to the compensation being claimed but are nonetheless being required to pay for it.”
The scheme will be funded by AFCA members. Claims usually go unpaid when the company involved in the complaint goes out of business, so it is up to the rest of the industry to meet the shortfall.
The proposal paper outlines an annual levy and a secondary funding mechanism, such as a capital reserve or special levy, that will be used if the levy is insufficient. Scheme fees will be subject to caps.
The government has called for submissions by August 13.