In a significant move towards protecting consumers, the Government announced the imminent commencement of the Compensation Scheme of the Last Resort (CSLR). The CSLR is a comprehensive scheme designed to compensate victims of misconduct by financial services firms licensed to provide relevant products or services, legislation for which passed in 2023. The scheme marks a pivotal moment in the government’s commitment to restoring trust and integrity within the financial services sector after the findings of the Hayne Royal Commission.
The scheme will commence from 2 April 2024 and will be operated by Compensation Scheme of Last Resort Limited (CSLR Limited), a new body established to administer the scheme. Once operational, the CSLR will be able to provide compensation of up to $150,000 to eligible consumers who have an unpaid determination from the Australian Financial Complaints Authority (AFCA) relating to the provision of personal financial advice, credit intermediation, securities dealing and credit provision.
For eligible individuals, the process unfolds in several clear steps. Initially, consumers must have an AFCA decision in their favour that remains unpaid. This means that prior to accessing the CSLR scheme consumers must have firstly lodged a complaint to AFCA which has been resolved in their favour. The AFCA complaints resolution process consists of registration and referral (which takes between 21 and 45 days) and case management (which takes between 7-21 days). Once all the information has been gathered, a decision will then be made by AFCA (no timeframe was forthcoming on the decision-making stage).
Following an AFCA determination awarding a consumer compensation, if that compensation order is not paid the consumer can submit a claim to the CSLR which then undergoes a thorough review process to ensure all eligibility criteria are met. Because it is a compensation scheme of last resort, compensation will only be payable after appropriate steps have been taken to require the AFCA member to pay. These include seeking an explanation from the AFCA member and explaining the consequences of failing to comply with the determination, including the possibility of cancellation of an Australian Financial Services Licence or Australian Credit Licence.
Successful claimants will receive compensation, capped at $150,000, thereby providing a safety net for those previously left without any other recourse. Compensation under the CSLR will be available to any relevant AFCA determination since the beginning of the AFCA scheme on 1 November 2018. CSLR Limited will not be able to consider the merits or facts of a dispute between a consumer and an AFCA member underlying an AFCA determination; rather, it is only responsible for providing compensation where eligibility requirements are met and where a consumer has accepted an offer of compensation. Further, it should be noted that AFCA can only consider complaints that fall within its remit. For example, AFCA cannot consider a complaint solely about the investment performance of a financial investment, nor cannot it consider a complaint about the level of a fee, premium, charge, rebate or interest rate where a consumer is unhappy that the cost has increased.
Consumers should also be aware that some financial services will be outside the scope of the CSLR, including managed investment schemes (eg property funds, agricultural schemes), dealing in foreign exchange or derivatives, arranging insurance (eg through a broker) and funeral insurance.
As the scheme takes effect, the government is hopeful that it will usher in a new era of financial security and trust, offering a beacon of hope for those who have suffered as a result of unscrupulous practices within the financial sector. The CSLR not only seeks to redress past wrongs but also to prevent future misconduct, ensuring a safer and more reliable financial environment for all Australians.
