Compensation Scheme of Last Resort

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This form contains five sets of questions drawn from the Treasury discussion paper which we invite you to submit your responses to.

What is the appropriate coverage for the CSLR, beyond the provision of personal advice?

Ramsay Review

The Ramsay Review considered that coverage by the CSLR should be based on the financial services provided by a financial firm rather than the type of financial firm providing the service. In terms of coverage, the Ramsay Review recommended that the CSLR initially be restricted to financial advice failures where a financial adviser (that is, a ‘relevant provider’) has provided personal and/or general advice on ‘relevant financial products’ to a consumer or small business. The Ramsay Review also recommended that the CSLR be scalable so that it could be expanded to cover other financial and credit services should evidence of significant uncompensated losses emerge. For the purposes of this paper, the Ramsay Review recommendation is considered to be a ‘narrow-coverage approach’.

Potential approaches to coverage

A ‘mid-coverage approach’ to CSLR coverage could be to include financial services that are not solely provided by prudentially regulated financial firms, such as distribution services (including the provision of financial advice and brokerage services), investment services (including services relating to investment in securities, managed investment schemes and derivatives) or credit provided to consumers and small businesses. This approach would mean that all firms engaged in the provision of these services, regardless of whether the firm itself was prudentially regulated or not, would be captured by the CSLR in respect of eligible services.

A ‘broad-coverage approach’ would be for CSLR coverage to apply to all activities that require a financial firm to hold AFCA membership. This broad based approach is similar to the broad based approach used by the UK FSCS.

What is the appropriate coverage for the CSLR, beyond the provision of personal advice?

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To what extent should the funding model be based on risk?

A risk based approach may be particularly appropriate for CSLR claims costs because those costs would be reflective of changing risk. In contrast, CSLR administrative costs would generally not reflect changing risk. It may therefore be appropriate for the funding model to apply administrative costs evenly across financial firms contributing to the CSLR.

A risk based funding model would be expected to result in a higher levy being imposed on financial firms authorised to undertake higher risk financial services. It is possible that the levy imposed could be unaffordable for some smaller financial firms, given the likely correlation between risk and financial firm size, leading to increased costs for consumers and potentially reduced competition for those financial services.

1. To what extent should the funding model be based on risk?

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2. How should risk be assessed?

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3. Should the funding model assess risks at the individual financial firm level or at the financial service class level?

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4. Should a risk based funding model apply to all CSLR costs?

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To what extent should the funding model be based on a firm’s ability to pay?

An alternative approach could be for the CSLR funding model to impose the costs of the scheme proportionately to a financial firms’ ability to pay, similar to the approach in the UK. That is, financial firms with a proportionately smaller share of the market for a covered financial service would pay a proportionately smaller levy to the CSLR. In contrast, financial firms with a larger proportion of the market for a covered financial service would pay a proportionately larger levy to the CSLR.

The proportionate approach would increase the likelihood that CSLR was affordable for all financial firms required to participate. However, it would also be likely to reduce the extent to which the cost of the CSLR is borne by those financial firms most likely to be the source of risk.

A proportionate approach could be implemented at either an individual financial firm or financial service class level. The complexity and regulatory cost would likely be less at a financial service class level.

1. To what extent should the funding model be based on a firm’s ability to pay?

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2. How should ability to pay be assessed?

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3. What are suitable universally available metrics to assess a firm’s ability to pay?

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How should the funding model address unexpected costs?

The Ramsay Review noted that there could be circumstances where the number and amount of claims made on a CSLR exceed its planned funding level. In this circumstance, the Ramsay Review suggested that the CSLR could address the issue by:

  • collecting additional levies once the CSLR has become aware of unexpected increase in cost;
  • including a buffer in levies as a means of protecting against future unexpected events; and
  • borrowing so that compensation is paid in a timely way while recouping the unexpected cost over time through higher levies to repay any borrowings.

1. How should the funding model address unexpected costs?

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2. Is it better to avoid levy volatility or funds being tied up in a capital base that may not be often used?

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3. If a CSLR capital base is to be established, what is a suitable minimum capital requirement?

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4. If levies are to be collected after the CSLR becomes aware of unexpected additional costs, how will financial firms manage this?

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5. Should a maximum cap apply to the annual levies that can be imposed on participating financial firms?

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6. If a maximum cap is imposed, what is an appropriate metric for this cap (for example, gross revenue from covered financial services)?

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7. If a maximum cap is imposed, what should the maximum cap be?

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How should compensation limits be used by the CSLR to balance the interests of consumers and those funding the scheme?

1. How should compensation limits be used by the CSLR to balance the interests of consumers and those funding the scheme?

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2. If the CSLR compensation limits are to be lower than AFCA’s claim limits, what limit would be appropriate?

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