AFCA Legacy Complaints - Where is the compensation scheme of last resort?

The implementation of a compensation scheme of last resort was a key recommendation of the Financial Services Royal Commission.

Specifically, Commissioner Kenneth Hayne recommended adoption of the three principal recommendations made by the Ramsay Supplementary Final Report into the Financial System External Dispute Resolution and Complaints Framework (September 2017).

These were:

• A compensation scheme of last resort should be established and carefully targeted at the areas of the financial sector with the greatest evidence of need.
• The compensation scheme should initially be restricted to claims relating to the provision of personal advice or general advice to consumers and small businesses, but be scalable to deal with other types of financial and credit services if evidence of significant problems of uncompensated losses emerge.
• The compensation scheme should be prospective – i.e. it should apply only to unpaid external dispute resolution (EDR) determinations, court judgments and tribunal awards which are made after the compensation scheme is established and, once established, the scheme should allow determination of disputes where a Financial Firm is insolvent or has been expelled from AFCA.

The Coalition Government committed to implementation of all recommendations in the Hayne Report following the Financial Services Royal Commission (except in respect of mortgage broking commissions), which means it committed to implementation of the principal Ramsay Supplementary Final Report recommendations.

So, is this what happened?

Not quite.

Instead, so far, two things have happened:

First, Treasury provided $30.7 million in the 2019 Federal Budget for AFCA to pay compensation to consumers and small businesses from existing unpaid external dispute resolution determinations – i.e. determinations from AFCA and its predecessor EDR schemes, primarily the Financial Ombudsman Service (FOS). AFCA is in the process of establishing this scheme now.

This has been reported as funding of “legacy complaints”. But it isn’t.

Second, Treasury provided funding of $2.1 million (to itself) and $0.5 million to AFCA to establish an industry-funded compensation scheme of last resort.

There is no guidance – yet – on whether this industry-funded compensation scheme of last resort would apply to “legacy complaints” – i.e. complaints made under AFCA’s limited expanded remit to accept financial advice complaints dating back to 1 January 2008 (a limited expansion to allow AFCA to consider complaints about conduct covering the period of the Royal Commission).

Technically, a retrospective scheme dealing with legacy complaints is not on all fours with the Ramsay Supplementary Final Report recommendations (and therefore the Hayne Report), which recommended prospective compensation after the scheme is established.

However, presumably, it will still apply to legacy complaints. Otherwise, the scope of compensation from legacy complaints will be limited to financial firms who, since 2008:

• Survived the GFC and are still around;
• Are solvent;
• Have up to 12 years of run-off cover for their professional indemnity insurance; and
• Are compulsory members of AFCA – i.e. still actively providing financial services.

It could be slim-pickings, and the reality of the implementation of Commissioner Hayne’s recommendations may result in no more than Pyrrhic victories for consumers.

Further, as the scheme is industry-funded, it should be expected that there is currently some intensive lobbying underway about its design. This may push out the timing and limit the funds available.

Whether or not the compensation scheme is delayed, given the limited 12-month window to make a legacy complaint, it would be prudent for someone who thinks they have a legacy complaint claim to lodge a complaint with AFCA now – even if it is only to preserve their rights at this stage, with the expectation that they could participate in a compensation scheme of last resort at a later stage.

It may well be first-in, best-dressed.

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