CSLR and FAR legislation introduced to parliament

Legislation on the Compensation Scheme of Last Resort (CSLR) and the Financial Accountability Regime (FAR) were introduced into parliament on Wednesday.

The current proposal for the CSLR was announced as part of the previous government’s response to the Financial Services Royal Commission, with the Albanese government tabling legislation and launching consultation on exposure draft regulations in September last year.

On Wednesday, the Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023, the Financial Services Compensation Scheme of Last Resort Levy Bill 2023, and the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2023 were introduced to the House of Representatives to establish the CSLR.

In its explanatory memorandum, the government said that the CSLR is intended to support confidence in the financial system’s external dispute resolution framework.

“The scheme provides for compensation to be paid to a consumer where a determination issued by AFCA remains unpaid and the determination relates to a financial product or service within the scope of the scheme,” it said.

“The Commonwealth will fund the establishment of the scheme and part of its initial operation. A levy will be imposed on parts of the financial services industry to fund the scheme’s ongoing operation.”

The first levy period, which will be funded by the government, will run until 30 June 2024, after which second and subsequent levy periods each financial year will be funded by the industry.

According to the government, the total levy amounts to be paid are capped in each levy period. The scheme levy cap for a levy period is $250 million, while a sub-sector levy cap also applies.

A consumer who has not been paid in accordance with a relevant Australian Financial Complaints Authority (AFCA) determination may apply to the operator of the CSLR for payment. If eligibility criteria are met, the consumer is required to be compensated up to $150,000.

The country’s ten largest banking and insurance groups - excluding health insurers and superannuation groups - will be required to pay a one-off levy to fund the backlog of accumulated unpaid claims relating to complaints made to AFCA between 1 November 2018 and 7 September 2022.

“The Australian financial system is central to the Australian economy and plays an essential role in promoting economic growth and stability,” the explanatory memorandum reads.

“A well-functioning framework for resolving disputes within the financial system is necessary to safeguard consumer trust and confidence, and to ensure the system continues to meet the needs of its users.”

The move has been welcomed by the Financial Services Council (FSC), who said that it reflected the government's focus on finalising the remaining pieces of the royal commission.

“The Assistant Treasurer has got the balance right with the CSLR scheme, which will provide consumers with a safety net of up to $150,000 for eligible unpaid Australian Financial Complaints Authority determinations,” FSC CEO Blake Briggs said in a statement.

“The CSLR will establish an industry funded scheme to protect consumers who have incurred losses while not excessively burdening customers and well-run organisations that have done nothing wrong with the costs of the scheme.”

Meanwhile, the Financial Accountability Regime Bill 2023, which was also tabled on Wednesday, introduces a new accountability regime for the banking, insurance and superannuation industries.

The regime will apply to the banking industry six months after commencement of the bill 2023 and, to new entrants, from the time they become an ADI or a non-operating holding company.

It will apply to the insurance and superannuation industries 18 months after commencement of the bill and, to new entrants, from the time they become licensed.

The government said that a key objective of the FAR is to improve the operating culture of entities in these industries and to increase transparency and accountability in relation to both prudential matters and conduct related matters.

“The regime is designed to improve the risk and governance cultures of Australia’s financial institutions by imposing a strengthened responsibility and accountability framework for those institutions and the directors and the most senior and influential executives (accountable persons) of those institutions,” it said.