Joint accounting bodies weigh in on CSLR scheme review

CA ANZ, CPA Australia and the Institute of Public Accountants have come together to urge Treasury to immediately reform the Compensation Scheme of Last Resort (CSLR) scheme design.

In a joint submission to Treasury, the bodies shared their post-implementation of the CSLR opinions, stating the exercise of ministerial powers under section 1069H of the Corporations Act 2001 was “a band-aid funding solution to a much larger issue that needs to be resolved as a matter of urgency”.

CA ANZ, CPA Australia and IPA attributed this view to the considerable strain placed on the funding of the CSLR scheme from increasing numbers of high-profile cases of financial services misconduct, which resulted in claims against the CSLR.

“The additional funding burden is disproportionately falling on the financial advice sector, in turn impacting on the financial viability of many financial advisers. This is unsustainable and will likely impact the ongoing viability of the scheme itself. Legislative reform is urgently needed to address this,” the bodies said.

“Irrespective of the immediate funding solution applied in response to this consultation, without reform to the CLSR scheme design it will be necessary for the minister to continue to exercise his or her powers in future years. We believe that such an outcome is unacceptable.”

Within their submission, it was suggested that the external dispute resolution (EDR) framework have appropriate safeguards in place to ensure all relevant providers were in a financial position to compensate their clients when necessary.

The bodies said safeguards that functioned properly would lead to most complaints being resolved and compensation paid at the EDR stage, therefore meaning the CSLR would genuinely be a “last resort”.

“It is imperative that the scheme is true to label, that it is truly operating as a ‘last resort’ and that action is taken to address the reason for the continued rise in compensation claims,” CA ANZ, CPA and IPA said.

“The framework must be re-designed as a matter of urgency so that every other option to support the funding of the compensation has been exhausted in the first instance.”

To amend this, the bodies said they were calling for a review of professional indemnity (PI) insurance requirements, better utilisation of Part 23 of the Superannuation Industry (Supervision) Act 1992, tighter regulation and scrutiny around managed investment schemes (MISs), including expanding the scheme to include MISs as contributors to the funding, and removing potential for conflicts of interest.

From the suggestions, the bodies said a review of PI insurance coverage requirements was ‘a must’ to ensure coverage was more robust and comprehensive, including the requirement for run-off cover where the insured is no longer licensed, insolvent or had been placed into liquidation or administration.

It was noted that it was imperative that ASIC took an active part in monitoring licensee compliance with PI insurance requirements, particularly in targeting licensees that were most at risk, such as new licensees.

“If the review of the PI insurance market identifies deficiencies in that market which cannot be solved by government intervention or ASIC is unable to actively monitor AFSL PI insurance requirements then the government may have to consider capital adequacy requirements for AFSL holders.”

“Such an outcome, we believe, is unacceptable. Setting capital adequacy requirements may lead to AFSL holders, and financial advisers in general, ceasing to operate.”

The bodies urged Treasury to make changes to the scheme as the funding challenge was amplified by a decreased number of financial advisers and the framework punishing those who had done the right thing and were still operating as financial advisers.