AFCA - Details of compensation scheme of last resort emerge
In case you missed it, the Federal Government announced in the week before Christmas 2019 that it intends to set up a compensation scheme of last resort to ensure individual and small business consumers will receive compensation for their valid claims, even if the financial firm involved becomes insolvent.
The design of the scheme is up for debate. Some broad parameters so far are that the scheme would be funded by imposing a levy on financial services providers – no hits on the budget surplus, then – and it would be administered by AFCA.
Customers who win at AFCA, in Court or at a tribunal would be able to access the scheme and get paid compensation, even where the firm or adviser involved has gone to the wall. The precise details of how this would work have not been revealed and are currently up for debate.
Treasury has released a discussion paper (which is here: link) along with a consultation process that invites submissions by 7 February 2020, with draft legislation to establish the scheme mooted for December 2020.
December 2020 was the date recommended by Commissioner Hayne for implementation of the scheme after the Banking Royal Commission. Treasury is aiming for that date – but with a critical caveat: the scheme would be implemented only for forward-looking unpaid determinations under AFCA’s rules. This would exclude Court and tribunal decisions and any determinations made by AFCA’s predecessors (i.e. FOS, CIO etc.). It may also exclude AFCA determinations before December 2020 – this is not yet clear. Either way, Treasury only plans to start addressing Court and tribunal decisions some three years later.
The consultation paper foreshadows other key factors of the proposed scheme, and some likely points of contention, including:
- Voluntary members of AFCA – i.e. unlicensed financial services providers such as small business lenders and debt management firms – would be excluded from the compensation scheme, so not to discourage them from becoming AFCA members in the first place;
- Treasury’s preference is for a risk-based funding model, rather than a broad-based levy. It would not necessarily be based on the ability of the financial firm to pay compensation. How that risk would be assessed imposes a layer of complexity that should benefit consumers, but may make it harder to administer the scheme. It also risks distorting the financial services market – i.e. a higher compulsory levy on higher risk financial services and products could reduce firms’ appetite to offer them.
- To assess risk, AFCA would require significantly more data about financial firms and the products they offer. Maybe that is a good thing.
- How to address unexpected costs, such as where the number or amount of claims from a particular product or service ends up being much higher than expected, and whether a buffer should be established – and, if so, how extensive any additional coverage should be.
- Whether to cap levies – and, if so, at what?
- Compensation limits – how to balance the interests of consumers versus the affordability of the compensation scheme for financial firms.
- Whether to limit – or even exclude – claims for legal and professional costs incurred by claimants in the scheme. At the moment, AFCA limits compensation payable for legal and professional costs to $5,000. The legal costs alone for a claimant are likely to well exceed that figure.
There is much to consider in Treasury’s discussion paper for implementation of the compensation scheme, which is likely to have a significant effect on not just the rights of consumers for compensation for dodgy advice and financial practices, but the operation and competitiveness of the financial services advice industry as a whole.
On the family-friendly date of 30 December 2019, AFCA released a statement in support of the proposed compensation scheme of last resort, but without any substantive detail of what the support would entail.
What do you think should be included in the compensation scheme of last resort?
