Compensation scheme of last resort – MIS investors continue to fall through the cracks

Despite significant lobbying by consumer and professional groups, draft legislation for a compensation scheme of last resort for financial services consumers is still set to exclude compensation for victims of failed managed investment schemes.  Recent history is littered with the long-tail effects of these failed schemes and significant related wealth destruction.  The failure to provide a ‘fall back’ for scheme investors is a significant issue which continues to leave consumers out in cold, needing to use tangential tactics to protect their interests of recover some value. 

The bill to implement the scheme currently sits unamended before the House of Representatives. It faces an uncertain future in the Senate. A Federal election looms in the middle distance and other priorities are likely to get in the way before this legislation is considered, notwithstanding it is allegedly the last of the Financial Services Royal Commission recommendations to be implemented (whether the steps taken so far actually implement the recommendations in full is up for debate). 

The push for a compensation scheme of last resort has a long back story, and it likely to only get longer, particularly as some of the politicians who pushed for its implementation have left parliament or will soon do. 

In the event the present Bill is passed,  its exclusion of losses suffered as a result of misconduct by the operators from the compensation scheme of last resort would follow a pattern of MIS investors falling through the cracks when it comes to legal redress.

There have been numerous cases brought by investors in failed managed investment schemes seeking redress for misleading or deceptive disclosure, contractual claims, and even fraud.  A prime example was the series of class actions launched in the past decade by investors in the Willmott, Great Southern and Timbercorp forestry managed investment schemes.  None of these claims could be termed successful.  They highlighted the difficulties caused by, among other things, the complex nature of the schemes and the indirect recourse that investors had to the actual assets they had paid for.  These cases also made clear the difficulties that investors in a failed scheme have in pursuing compensation in reliance upon defective disclosure, and the limitations of the law in that respect.  What made matters worse was that these investments were – usually funded by large personal loans.  

Even those investors who brought successful claims in some cases have found at the end of the process that there is often little left of the scheme to recover after secured creditors have been paid.

In this context, unsurprisingly, attention has turned to Government fall-back provisions, such as the proposed compensation scheme of last resort, or even claims against the Commonwealth Government itself under the Scheme for Compensation Detriment caused by Defective Administration (CDDA Scheme).

We will review the CDDA Scheme in another post.

In relation to the compensation scheme of last resort, critically, it has its own limitations.  Even if it was expanded to include managed investment scheme losses:

• It only applies to successful determinations made in AFCA – which itself lacks the capability to assess complex schemes (noting that, in its prior iteration – FOS – it did not accept managed investment scheme claims at all).
• It is limited to compensation of $150,000 – versus AFCA’s limit of approximately $500,000 for an individual and $2 million for a business.
• It applies only to unpaid determinations since the commencement of AFCA (November 2018) – so earlier successful determinations will apparently miss out.

This highlights the importance for investors in failed schemes to think more broadly and consider if any other options are available.

If the scheme failure was recent or is imminent, Matthew Kennedy of Mackay Chapman has outlined alternative options that investors should consider

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