Proposed Revisions to the Compensation Scheme of Last Resort: A New Focus on Capital Losses

The debate surrounding the Compensation Scheme of Last Resort (CSLR) in Australia has intensified, particularly with the suggestion of confining claims to capital losses only. This idea aims to lessen the financial burden on advisers while ensuring victims receive fair compensation.

Support for Limiting Claims

Pat Conaghan, the newly appointed shadow financial services minister, has voiced strong support for excluding “but for” claims from CSLR payments. This follows the recent submission by the CSLR operator to Treasury’s post-implementation review.

“The Coalition entered the last election with a commitment to eliminate the ‘but for test,’ and the CSLR’s submission validates the necessity of this change,” Conaghan stated. He emphasized the importance of sustainability in the scheme, so that victims are not left without support: “Tough decisions must be made, but victims deserve a fair, functional, and enduring scheme.”

Insights from the CSLR Submission

In its detailed submission, the CSLR acknowledged that the Australian Financial Complaints Authority (AFCA) employs a widely accepted legal definition for calculating loss in financial advice complaints. “AFCA is required to determine ‘direct’ loss, which evaluates what a consumer’s position would have been if appropriate guidance had been provided,” the submission elaborated.

This raises concerns about sustainability, particularly since many claims predominantly revolve around capital losses. The CSLR emphasized the need for legislative changes to reinforce the scheme’s longevity.

Recommendations for Improvement

The CSLR’s recommendations focus specifically on the CLSR’s compensation criteria, without altering how AFCA determines losses. This ensures that the process’s integrity remains intact, while also addressing the financial viability of the CSLR itself. While discussing the submission on The ifa Show, CSLR CEO David Berry suggested limiting compensation to a ceiling of $150,000, strictly for capital losses.

Berry noted, “As a last-resort scheme, we have defined limitations on compensation claims. The $150,000 cap serves this aim well, particularly in regard to capital loss only.”

Calls for Swift Action

Shadow Minister Conaghan expressed frustration over the government’s slow response, noting that victims have been left waiting for resolutions following announcements made by former minister Stephen Jones and current Minister Daniel Mulino regarding the scheme. “Without timely decisions, the CSLR will soon find itself depleted of funds,” Conaghan warned. “Every month of indecision jeopardizes the financial stability of numerous victims.”

He underscored that the cost pressures from the CSLR are contributing to a declining financial advice sector: “Advisers are already bearing more than their fair share, all while being burdened by impending financial liabilities,” Conaghan stated.

The Big Picture on the CSLR

During a recent ifa webinar, Berry mentioned that around 80% of the claims directed to the CSLR fall under the “but for” category. “We cannot challenge any determinations. Whatever the amount decided, that is considered the loss,” he said. In essence, AFCA calculates whether a claimant would have achieved a better return had they received sound advice.

This discussion is particularly significant, as many claims reaching the CSLR are not limited to the “but for” category; a significant portion surpasses the $150,000 cap simply based on capital losses, highlighting the pressing need for reform within the CLSR.

Conclusion: The Need for Sustainable Change

The ongoing discourse over the CSLR is crucial for ensuring both the victims of financial advice malpractice and the advisers who work within the system. The proposed narrowing of claims to capital losses presents an opportunity for a more sustainable and equitable framework.

Conaghan maintains that sustainable reforms are essential, claiming, “We need a CSLR that duly supports victims without placing an excessive burden on sectors that have little agency over significant financial failures.” As stakeholders await decisions on these reform measures, the urgency for a well-defined, functional compensation framework continues to grow.