- Financial advice industry opposes design of proposed Compensation Scheme of Last Resort (Compensation Scheme)
- Concerns compensation scheme will become a go-to option rather than last resort
- Proposed Compensation Scheme unfairly exempts some industry participants, such as product providers.
Eight of Australia’s largest financial advice industry associations have united to oppose the design of the Financial Services Royal Commission's Compensation Scheme, contained in draft legislation released for public consultation.
Chartered Accountants Australia and New Zealand (Chartered Accountants ANZ), CPA Australia, Financial Planning Association of Australia (FPAA), Institute of Public Accountants (IPA), SMSF Association (SMSFA), Association of Financial Advisers (AFA), Stockbrokers and Financial Advisers Association (SAFAA) and the Boutique Financial Planning Principals Association Inc. say the proposed scheme will make financial advice less affordable and accessible.
The Financial Services Royal Commission recommended establishing a Compensation Scheme to provide a pathway for eligible consumers to be compensated when a determination remains unpaid and all other avenues had been exhausted.
All eight associations support a compensation scheme that is truly 'last resort', however, the current structure includes the Australian Financial Complaints Authority’s (AFCA) outstanding expenses, in addition to failing to address the causes of unpaid consumer compensation. The associations share a concern that the Compensation Scheme may not be used purely as a last resort – this is a major and unwarranted departure from the Royal Commission’s intent.
The Federal Government made a commitment to reducing red tape to cut the cost of doing business. The proposed Compensation Scheme will add significant cost and complexity, which is at odds with this commitment.
The draft legislation establishes a Compensation Scheme operator as a subsidiary of AFCA. This adds unnecessary red tape by requiring the Australian Securities and Investments Commission (ASIC) to administer invoices and payments, which significantly increases the Governments' administration costs of the financial advice sector with little benefit to consumers.
ASIC fees for financial advisers have increased by more than 230 per cent over the past three years. Most financial advisers are sole traders or small businesses who cannot afford the rising costs associated with increased regulation. Others are authorised representatives of groups who participate in other compensation schemes, which adds duplication.
Impacts of COVID-19 and Australia’s ageing population mean the nation’s advice needs are growing, yet escalating regulatory costs have already caused many advisers to leave the industry. The total number of financial advisers has fallen below 20,000 and will not be enough to meet increasing demand. We anticipate the proposed Compensation Scheme will further reduce adviser numbers.
Responsibility for consumer losses and complaints should be shared evenly across the sector. However, the proposed scheme does not apply to some industry participants, such as product manufacturers.
This means that manufacturers whose products are poorly designed – and improperly fail – won’t have to contribute to the compensation scheme.
The associations will be making individual submissions in the public consultation process to voice these concerns and oppose the draft legislation.
We are calling for the government to amend the draft legislation to ensure the proposed Compensation Scheme can only be used as a last resort, is appropriately calculated and applies to all financial service industry participants.
Dr Jane Rennie
General Manager External Affairs
P: +61 425 869 017
E: [email protected]
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