Cth Draft Proposes Introduction of the Compensation Scheme of Last Resort
On 16 July 2021, the Federal Treasury released for public consultation draft legislation to propose the implementation of the Compensation Scheme of Last Resort (‘the CSLR’).
The draft legislation released are as follows:
- [Draft] Treasury Laws Amendment (Measures for Consultation) Bill 2021: Compensation Scheme of Last Resort (Cth)
- [Draft] Financial Services Compensation Scheme of Last Resort Levy Bill 2021 (Cth) (‘the Levy Bill’)
- [Draft] Financial Services Compensation Scheme of Last Resort Levy (AFCA Fees) Bill 2021 (Cth) (‘the AFCA Fees Bill’)
- [Draft] Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021 (Cth) (‘the Collection Bill’)
As summarised on the Treasury consultation page:
"The draft legislation contains 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."
This article will focus on the [Draft] Treasury Laws Amendment (Measures for Consultation) Bill 2021: Compensation Scheme of Last Resort (Cth) (‘the Draft Bill’).
Submissions are currently open for the draft legislation.
The draft legislation follow recommendations made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘the Royal Commission’). The Royal Commission and its interim report were discussed in an earlier TimeBase article.
What is the Compensation Scheme of Last Resort?
The idea for the CSLR was first introduced in the Final Report of the Review of the Financial System External Dispute Resolution Framework (‘the Ramsay Review’). According to the Draft Proposal Paper, the Ramsay Review concluded that:
"existing redress arrangements are inadequate to ensure all consumers and small businesses are compensated for losses, especially in the circumstances where an external dispute resolution scheme, tribunal or court has found that there has been misconduct by a financial firm and makes an award in their favour.”
Subsequently, the Royal Commission concurred with the Ramsay Review findings and also recommended that a CSLR should be established.
According to the Draft Explanatory Materials:
“The main objective of the proposed CSLR is to provide a pathway for eligible consumers to receive compensation, flowing from an AFCA determination in their favour, where the financial firm has not paid the consumer in accordance with the determination.”
Who will operate the CSLR?
The Draft Bill seeks to allow the Minister to appoint a company to operate the CSLR. This designated company would be known as the ‘CSLR operator’.
The Draft Bill proposes that the CSLR operator must meet certain requirements, including that it:
- must not charge fees to applicants seeking compensation;
- must be a not-for-profit company limited by guarantee;
- must conduct its business in accordance with its constitution and any applicable regulations;
- must have the appropriate expertise to carry out its central functions of compensation claims assessment and estimation of scheme costs; and
- must comply with any conditions specified by the Minister upon its appointment.
How does a consumer make a claim?
In order to apply for a compensation application to the CSLR operator, there are two main requirements:
- the applicant must have a relevant Australian Financial Complaints Authority (‘AFCA’) determination; and
- the applicant must meet all the requirements prescribed by the regulations.
A ‘relevant AFCA determination’ refers to a binding determination issued, which requires a AFCA member (i.e. a financial firm) to make a payment to the applicant to compensate for the applicant’s losses and either no payment or a partial payment was made. The AFCA must also have taken reasonable steps to recover the fees before the consumer can apply for a compensation claim.
As to the second requirement, the Draft Explanatory Materials state that regulation-making powers:
“[may include] an assessment of the likelihood of the applicant getting their payment from the financial firm, and a requirement prohibiting the applicant from recovering compensation under any other statutory scheme for matters that pertain to their AFCA determination ... [and seek to] provide the Government with the necessary flexibility to make timely responses to changes in the financial system”.
How is the amount of compensation determined?
According to the Draft Explanatory Materials, the CSLR operator would generally have the power to grant compensation equivalent to the amount the AFCA prescribed in its determination. However, the Draft Bill also seeks to establish a maximum compensation amount of $150,000.
Further, compensation payments would also be subject to ministerial determinations. A ministerial determination may lower the cap for a particular group of claims or require that compensation must be paid in installments.
How is compensation paid?
The Draft Bill proposes that if an applicant is eligible for compensation, the CSLR operator would make an offer in writing to the applicant. Once the applicant agrees to the compensation amount and the terms of the offer, the applicant can receive their payment.
The Draft Explanatory Materials also outlines that the Draft Bill also proposes that:
"If a compensation payment is made, the operator is required to notify ASIC of the details of the financial firm that was the subject of the relevant AFCA determination and the circumstances surrounding its failure to pay the amount determined by AFCA. This allows ASIC to consider taking action, including suspending or cancelling relevant licences."
How would the CSLR be funded?
The Draft Bill was introduced with a group of other related bills.
The Levy Bill, the Collection Bill, and the AFCA Fees Bill collectively propose a levy framework which would create a tax to be levied against relevant industry entities to fund the CSLR.
The Draft Explanatory Materials identify two key features of the levy framework:
- "The CSLR’s levy framework contains a primary funding mechanism (‘annual levies’, including the capacity to revise estimates of annual levy) and, if needed, a secondary funding mechanism involving a Ministerial determination (‘further levies’).
- ASIC, on behalf of the Commonwealth, is responsible for issuing levy notices and collecting all levies imposed under the scheme."
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[Draft] Financial Services Compensation Scheme of Last Resort Levy (AFCA Fees) Bill 2021 (Cth) and additional explanatory materials available from TimeBase’s LawOne service.
[Draft] Financial Services Compensation Scheme of Last Resort Levy Bill 2021 (Cth) and additional explanatory materials available from TimeBase’s LawOne service.
[Draft] Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2021 (Cth) and additional explanatory materials available from TimeBase’s LawOne service.
[Draft] Treasury Laws Amendment (Measures for Consultation) Bill 2021: Compensation Scheme of Last Resort (Cth) and additional explanatory materials available from TimeBase’s LawOne service.