Speaking at a Fairfax event, Senator Jane Hume dismissed the idea that the proposed scope of the compensation scheme of last resort (CSLR) should be expanded to include a wider range of products and services, including managed investment schemes.
Noting that the CSLR is "not an insurance designed to pay compensation to any consumer who has lost money in an investment," Hume said it is only designed to address consumer compensation for misconduct relating to a "targeted range of products and services." As a result, she added, there were no plans for it to cover managed investment schemes or "other high-risk financial products."
Hume's argument was that expanding the CSLR would have a negative impact on "everyone who makes sensible, cautious, informed investment decisions." This is because such people would see their "returns clipped to underwrite people who punt their savings on emu farms or tulips or other too-good-to-be-true high-return, high-risk investments."
"If you want to punt a portion of your savings on something speculative," she added, "knock yourself out. No government should stand in your way. But you should be prepared to wear it when it goes wrong.
"Any finance textbook will tell you [that] higher returns are compensation for higher risk. Governments tinker with that fundamental principle at our peril."
The idea that "sensible investors" would see their returns "clipped" by a broader CSLR appears to be based on industry levies for the equivalent scheme in the UK, the Financial Services Compensation Scheme. There, Hume noted, levies had more than doubled from £243 million in 2013 to £564 million last year.
That levies might increase under a broader CSLR isn't likely to comfort many advisers, though, given that they will already be on the hook for the bulk of the scheme's industry funding as currently designed. Under the CSLR's proposed funding model, the advice sector will be billed an estimated $12.3 million in the first year and $7.5 million for the next two years. This breaks down to a levy of $544 per adviser in year one and $341 per adviser in years two and three.
On an ongoing basis, the advice sector will pay around $6.2 million in annual levies ($291 per adviser), substantially above the amounts leviable for other products and services included in the scheme.
Moreover, because managed investment schemes are excluded from the CSLR despite being included in AFCA's remit, advisers have raised concerns that they could be held responsible for matters beyond their control (such as product failures) should a customer's complaint progress to this stage.
When the CSLR proposal was announced, the AFA said it was "astonished" by what had been excluded from the scheme, adding that "the Government has provided no justification for why that is the case."
Hume's statement might be considered a form of justification, but it's unlikely to satisfy anyone in the advice industry.
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