AFCA backs proposal for new Australian compensation scheme

Maria Nikolova

The dispute resolution body insists that the new scheme should have coverage across all financial services.

Shortly after the Australian government released a public discussion paper on establishing a Compensation Scheme of Last Resort, the Australian Financial Complaints Authority (AFCA) has issued a statement regarding the proposal.

The financial dispute resolution body notes its strong support for creating an industry-funded scheme of last resort. AFCA and its predecessor schemes have long advocated for the establishment a compensation scheme of last resort. The body argues that it is important that the new scheme is appropriately funded and governed and has coverage across all financial services.

AFCA says it believes the establishment of a compensation scheme of last resort plays a significant role in restoring trust and confidence in the wider financial system. The body will continue to engage with the government and other stakeholders on the matter.

The proposed compensation scheme of last resort (CLSR) will aim to ensure that consumers and small businesses receive compensation where a financial service provider is found to have engaged in misconduct and is unable to pay.

There are a number of potential approaches to the CLSR coverage.

A ‘mid-coverage approach’ to CSLR coverage, for example, would include financial services that are not solely provided by prudentially regulated financial firms, such as distribution services (including the provision of financial advice and brokerage services), investment services (including services relating to investment in securities, managed investment schemes and derivatives) or credit provided to consumers and small businesses. This approach would mean that all firms engaged in the provision of these services, regardless of whether the firm itself was prudentially regulated or not, would be captured by the CSLR in respect of eligible services.

A ‘broad-coverage approach’ would be for CSLR coverage to apply to all activities that require a financial firm to hold AFCA membership. This broad based approach is similar to the broad based approach used by the UK Financial Services Compensation Scheme.

The consultation is open until February 7, 2020.

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