Along with the Financial Accountability Regime (FAR) to extend the standards of conduct in major changes to the finance sector, the government has introduced Bills to implement the Compensation Scheme of Last Resort (CSLR) to enact the recommendations from the Financial Services Royal Commission.

According to the Bill, the main purpose of the CSLR will be to provide compensation to eligible consumers where the Australian Financial Complaints Authority (AFCA) has made a determination in favour of the consumer and where the relevant financial firm has not paid the consumer in accordance with the determination. Where eligibility criteria are met, the consumer may apply to the operator of the CSLR for an amount up to $150,000.

A consumer will be eligible to apply for compensation under CSLR where:

• a relevant AFCA determination requires an amount to be paid by an entity to the consumer (the relevant entity may not be a legal person due to deregistration);
• the consumer notifies AFCA in approved form that the amount has not been paid within 12 months after the day the determination was made, or a longer period which AFCA has agreed to;
• if applicable, appropriate steps have been taken by AFCA to necessitate the payment, and after all steps are taken, the consumer remains unpaid;
• the consumer is not eligible to receive payment under another statutory scheme; and
• the CSLR operator reasonably believes that the relevant entity that is or was an AFCA member, having regard to their financial position, is unlikely to fully pay the amount.

To be a relevant AFCA determination, it must relate to one of more of the following products of services:

• engaging in credit activity as a credit provider or other than a credit provider;
• providing financial product advice that is personal advice provided to a person as a retail client about one or more products that include at least one relevant financial product; and
• dealing in securities for a person as a retail client, other than issuing securities.

Compensation under the CSLR will be available to any relevant AFCA determination since the beginning of the AFCA scheme on 1 November 2018.

The operator of the CSLR 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.

It should be noted that compensation under CSLR is intended to be a last resort only. Therefore, to reflect that, 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 cancellation of their Australian Financial Services Licence or Australian Credit Licence.

The CSLR operator will also discuss with the AFCA member a reasonable payment plan if applicable and where an entity has entered into a form of external administration, to assess whether the entity will pay the consumer. For amounts in excess of the $150,000 limit that is not compensable under CSLR, the excess will remain a debt owed which can be pursued outside of the CSLR by the consumer.