Recently, the Government released a discussion paper on establishing an industry-funded compensation scheme of last resort (CSLR). The discussion paper is part of the government's response to the Hayne Royal Commission which recommended establishing a CSLR so that consumers and small businesses can receive compensation where a financial services provider is found to have engaged in misconduct and the provider is unable to pay.

The Government has committed to implementing the CSLR, to be operated by the Australian Financial Complaints Authority (AFCA), by no later than December 2020. Here, partner Elliott Stumm outlines some key features of the proposed CSLR.

Key features

The discussion paper concentrates on four main features of the CSLR being:

1. Coverage, beyond personal advice—although historically the highest contributor to unpaid determinations was in relation to giving financial advice, it is proposed to extend coverage to include other financial services (such as services relating to investment in securities and managed investment schemes). It is also suggested that coverage could be broadened even further to apply to all activities that require a financial firm to hold AFCA membership.
2. Funding arrangements—in particular, whether the funding required from a firm should be based on risk (taking into account the types of financial services or financial products) or instead on a firm's ability to pay.
3. Compensation to be paid—the appropriate level of compensation limits.
4. Managing scheme evolution—whether the setting of levies should be left for AFCA as operator to determine or whether this needs to be prescribed in legislation.

The discussion paper specifically excluded consultation on whether there should be a CSLR or whether any alternatives should be considered, including changes to professional indemnity insurance or the adequacy of financial resource obligations of AFS licensees.

It is expected that draft legislation to establish the CSLR will be available in mid-2020 if the CSLR is to be established by the end of the year.