NIBA submission to Treasury consultation on Compensation Scheme of Last Resort

The National Insurance Brokers Association (NIBA) has provided a submission to the Treasury consultation on the Compensation Scheme of Last Resort (CSLR). The CSLR will provide compensation to retail and SME clients with unpaid Australian Financial Complaints Authority (AFCA) determinations if a financial firm goes into liquidation or ceases trading.

The CSLR was recommended by both the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the Ramsey Review.

NIBA has raised several concerns about the proposed CSLR, including the expansion of the scheme to include services that were out of scope of the original recommendation by the Ramsey Review.

The expansion has been proposed despite a lack of evidence to suggest that a significant problem on unpaid compensation exists within these areas.

NIBA also questioned why other areas of the Ramsey Review were ignored in the design of CSLR, in particular, greater regulatory oversight and data collection by the Australian Securities and Investments Commission (ASIC) regarding professional indemnity insurance. NIBA argued that effective regulatory oversight combined with the new intervention powers granted to ASIC would significantly decrease demand for a CSLR.

The submission also highlighted that the proposed scheme does not adequately address the issue of moral hazard. With the current design providing an incentive to dishonest firms to use the scheme to underwrite poor governance practices or unethical conduct, safe in the knowledge that the scheme will ‘pick up the tab’.