Compensation scheme must go beyond advice: AFCA

In its submission to Treasury’s consultation on the scheme, which closes on Friday, AFCA said the type of financial service or product through which a consumer had suffered losses should be irrelevant to their ability to receive compensation in the event that the relevant firm was insolvent.

“While many of the unpaid determinations have arisen from the provision of financial advice that has caused financial loss, the evidence indicates non-compliance with determinations is not limited to financial advice firms,” the ombudsman said.

“In our view, all firms are responsible for restoring trust in financial services and ensuring external dispute resolution obligations are met.”

AFCA said it was important the compensation service include managed investment schemes, given this sector was a particular risk when it came to misconduct, and including firms that were involved in the distribution or funding of such schemes, regardless of whether they were licensed, would increase accountability in this sector.

AFCA’s submission continued: “In our view, including MIS and other financial products in the CSLR coverage should also be considered in the context of other relevant regulatory reform that has been implemented, including the recent introduction of ASIC’s product intervention powers and unfair contracts legislation which apply to this group.”

The ombudsman said the forthcoming scheme should be funded by financial firms based on size and the risk level of the sectors they were involved in, with current AFCA compensation caps and indexation arrangements used to set the maximum amount of compensation that could be awarded.

In order to cover the costs associated with a large-scale failure in the financial sector, AFCA suggested payments in these situations could be spread over a number of years, and priority given to those experiencing hardship such as extreme financial stress or terminal illness.

AFCA chief executive David Locke said the broad-based nature of the scheme was key to restoring consumer trust in financial services in the wake of the royal commission.

“The rebuilding of trust is in the interest of all financial services firms and all Australians,” Mr Locke said.

“We look forward to working with the government and stakeholders to implement this important reform.”