How compo for bad financial advice is a game changer

The new Compensation Scheme of Last Resort fills a much needed gap in financial advice – and 2000 people are already in line to receive a settlement.

More than $20m was stolen by Melissa Caddick and a sale of her assets is distributing about $3m.

Earlier this week the receivers of the Melissa Caddick estate finally made some payments to the unfortunate investors who were taken in by the late fraudster.

More than $20m went missing in the spectacular case of the Sydney woman who disappeared after an astonishing amount of money had been pocketed from her client base.

In fact, you might think a $3m distribution from the receivers is not much when set against the total amount missing in the Caddick affair.

But as Jones Partners, the accountants who managed to sell some of Caddick’s property and stocks, put it, it’s not unusual for people investing in Ponzi schemes to receive nothing.

This is about to change.

One of the harsh realities of the financial advice sector is that when companies go under, investors have no avenue to seek compensation. Worse still, the companies that go under are the ones that owe the most money.

So there has been a gaping hole in the middle of the financial advice arena where investors owed money by paid-up professionals have recourse to justice, but those owed by operators who are not members of professional associations get left high and dry.

Only a few weeks ago the Compensation of Last Resort Scheme passed parliament.

Importantly, the Australian Financial Complaints Authority has already tagged thousands of cases to be reviewed in the new scheme: there is about 5000 complaints in this queue with indications that about 2000 of them will be taken up but the new authority.

The CSLR will be a stand-alone operation. For now though it is effectively housed within AFCA, which is in the process of setting it up as an independent not-for- profit with its own board and funding arrangements.

If it works effectively, the CSLR scheme should be a breakthrough. If you are invested in a company that goes under or there is no other avenue to settle a claim, redress can be sought through the scheme up to a maximum of $150,000 a person.

The government has seeded the scheme within initial funding of more than $200m, but its ongoing costs will be funded though a levy placed on the financial services industry.

The idea for such a scheme has been regularly put forward over the years, particularly at the Hayne royal commission in 2017. As superannuation legal specialist Fiona Halsey of Halsey Legal Services, said on this week’s Money Puzzle podcast: “It’s a game changer.”

Crucially, Halsey points out that the new scheme is to some extent retrospective – it will cover issues back to 2018. So if you are owed money by the company or practice that went under in that time period, you could still get compensated.

Melissa Caddick and husband Anthony Koletti.

As always with a scheme such as this, there are complaints about what is included – and the exclusion of managed investment schemes (MIS) is a substantial exclusion.

According to Sarah Abood, CEO of the newly minted Financial Planning Association of Australia: “A major cause of consumer hardship in our sector is MIS failure and this is not covered in the legislation.”

As a recent note from the FAAA reported: “At present, after nearly four years of operation, there is $3.7m in unpaid AFCA determinations relating to financial advice due to insolvency. Yet MIS operators have $6.4m outstanding against them at present. The total unpaid determinations are $14.7m across all the areas AFCA manages.”

(Last week the government announced a separate review of MIS schemes with the release of a consultation paper and a period for submissions that closes on September 29.)

Nobody has a clear picture as yet as to how much it will cost to run the CSLR. But it would be at least $6m a year for the office and if it was to keep up with the pace set by the government’s seed funding, that would run to more than $200m a year in payouts.

Industry leaders such as Abood are concerned that advisers today could also end up paying for the failings of the past under current arrangements: “We will need to keep an eye on the running costs to ensure they are reasonable,” she suggests.

Similarly, there are concerns about which precise parts of the financial services industry will actually stump up for this pooled compensation fund. Financial advice already costs more than $3000 a year and the industry lobbyists suggest a levy linked with the scheme would lift costs even higher.

Either way the CSLR will include:

● Personal financial advice provided to retail clients on relevant financial products

● Dealing in securities for retail clients (but not issuing securities)

● Providing credit (where a financial firm provides funds)

● Arranging credit where someone like a mortgage or finance broker arranges funds.

Ironically after five years’ operation, AFCA is still little known in the wider world; recent surveys have found it has low recognition levels with the wider public who probably still remember the units it replaced such as the Superannuation Complaints Tribunal.

Once the CSLR is up and running whatever the budget might be, they should spend a slice of it on getting into the public eye.

Until then you can do your own research at www.cslr.org.au here

Originally published as How compo for bad financial advice is a game changer