Compensation scheme for financial misconduct victims begins
The Compensation Scheme of Last Resort (CSLR) has opened its doors, ready to compensate about 2000 claimants who have long waited for redress.
"We look forward to supporting a number of people who previously haven't had access to any sort of recourse to help them recover some of the funds that they may have lost. We're looking forward to being able to assist them through that process," says CSLR's inaugural chief executive, David Berry.
The CSLR's remit is limited to four areas: credit intermediaries, such as mortgage brokers, credit providers, such as lenders, financial advisers, and general securities dealers, or stock exchange organisations. The maximum compensation amount is $150,000.
One major criticism of the CSLR is that it does not consider managed investment schemes (MIS).
It also overlooks litigation funding schemes, time-sharing schemes, issues relating to tax treatment, the Corporate Collective Investment Vehicle regime, or the rights and obligations of custodians.
Prior to the CSLR, Berry says that there was no opportunity for redress where a determination had been made by the Australian Financial Complaints Authority (AFCA) and the organisation has either refused to pay or been unable to pay.
"Prior to the commencement of the scheme, there was very limited, if not any source of compensation for those people who've experienced some form of financial harm."
For the first year of operations, the CSLR levy is estimated to cost $4.8 million to cover the period from April 2 to 30 June 2024. This will be funded by the government. The CSLR will pay 11 claims for this period, one of which is for a Dixon Advisory victim.
The second levy estimate, however, totals $24.1 million and will be borne by the sectors it regulates. Financial advisers will pay the largest chunk of $18.5 million to cover the period between July 1 and 30 June 2025.
CSLR expects to pay 129 claims for this period, of which 86 relate to former Dixon Advisory clients.
The Financial Advice Association Australia (FAAA) slammed the CSLR levy as 15,624 registered advisers will have to fork out about $1200 each.
"I totally appreciate that any additional costs for small businesses is not something that people would welcome," Berry says.
"I would highlight though that the majority of the Dixon cost is being borne by the 10 largest lenders and general insurance; they're fronting up $241 million to support the compensation. I appreciate their position.
"We are acting in accordance with the legislation; we have worked through what we see is the likely claims which we'll need to pay. And as such, that's the number. We can't really refute that number at the moment."
This amount will cover about 1556 Dixon Advisory claims.
Many of the organisations the CSLR will work with are either in administration or in liquidation.
"Where we can, we use all the available information and it really does sit with AFCA being able to get as much information as they can to make that determination," Berry says.
"Once AFCA has made that determination and awarded compensation, if that money is not paid, that's when it will come to us. And we will pretty much stand in for the organisation that either no longer exists or has been unwilling or unable to make the payment."
Commenting on the launch, inaugural CSLR chair Jo-Anne Bloch maintained that the scheme would act as an essential backstop.
"Previously, compensation options were limited and often inaccessible in cases of insolvency. Large sums were simply written off, with no second chances to recoup the losses. The CSLR provides a crucial safety net."
This article first appeared on Financial Standard
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