Here comes the money: New financial advice compensation scheme off and running

Delia Rickard has joined the CSLR as a non-executive director.

This year things might just change if you lose money to a financial adviser that goes under.

The new Compensation Scheme of Last Resort (CSLR) scheme is up and running after key executive appointments were made over the Christmas period.

This week the CSLR announced its first major move – a $241m fund to go towards a backlog of historic claims against failed advisers.

The CSLR board also announced that the scheme would from April be taking ongoing applications for compensation.

Money distributed by the scheme will go to applicants who have applied for compensation from failed advisers and have come to the end of line in terms of the existing recovery pathway.

A statement this week from the scheme operator says: “The CSLR is designed to provide compensation for eligible complainants who have a determination in their favour from Australia’s financial ombudsman service, the Australian Financial Complaints Authority (AFCA), but the financial firm has become insolvent or cannot pay.”

The $241m announced this week to deal with the existing claims backlog is seen as a guide to the scope of the new scheme. It is expected to make payouts around the $200m mark each year from 2024 onwards.

It is understood the largest group of claimants within this first payment cohort are former clients of the ill-fated Dixon Advisory business, which went into administration in January 2022.

Under the CSLR scheme the maximum amount per capita that can be allocated will be $150,000, which is considerably less than the bank guarantee scheme under which anyone saving in an Approved Deposit Taking Institution has their savings guaranteed to the tune of $250,000 per person per bank.

Initially housed within AFCA, the CSLR will become a new player in financial regulation this year following the appointment of key personnel in recent weeks.

David Berry has become the inaugural chief executive officer and Delia Rickard will be a non-executive director. Berry is a former CEO at Way Forward Debt Solutions, the non-profit credit counselling service, while Rickard is a former deputy chair of the Australian Competition and Consumer Commission.

The government has yet to appoint an independent chair.

Despite a clear gap in the market, whereby investors unlucky enough to be owed money by a failed adviser had been left high and dry, the CSLR scheme has been resisted by some as big banks and insurers will be forced to bankroll the program. The program will be financed through a levy imposed by the regulator, the Australian Securities and Investments Commission.

Officially, the CSLR is designed to consider issues relating to:

Personal financial advice;

Securities dealing for retail clients;

The provision of credit (where a financial firm provides funds);

The arranging of credit (where someone like a mortgage or finance broker arranges funds).

There have also been suggestions the scheme will create a “moral hazard” – that is, the existence of such compensation arrangements will disturb market forces and in this case encourage key players to do less compliance work.

However, the scheme will be welcomed by clients struggling to recover losses when financial advisers let them down; the worst advisers are also among the most likely to fail.

Meanwhile, AFCA itself has just released its complaints report for the last calendar year which show scam-related complaints doubled over the 12 months – up 95 per cent from 46121 to 8987.

AFCO chief David Locke said the hope was that 2024 would be “the year that anti-scam initiatives by industry and government finally disrupt this serious and organised crime”.

The single most complained about product were personal transaction accounts while the single most common “issue” was unauthorised transactions.

According to Locke, complaints across the financial system have been expanding dramatically.

“The volume of complaints escalated to AFCA has been increasing at an unsustainable rate – in their final full year the predecessor dispute resolution bodies received 52,000 complaints, last financial year AFCA received 97,000 complaints,” he said.

Locke also noted that the complaints against financial advisers had fallen “in the wake of the royal commission” which was held in 2017.

However, since the sheer number of advisers has fallen by nearly 50 per cent in recent years this drop may actually be misleading.