Daniel Mulino:
The Compensation Scheme of Last Resort was really set up to protect consumers in the financial services system when something bad has happened to them due to somebody breaching a duty or conducting fraud. But after having received a positive determination through the independent regulator AFCA, that party can’t or won’t pay. So, the Compensation Scheme of Last Resort can pay up to $150,000 in those circumstances. The way it works is the first port of call is the sector that most directly relates, but where there are really big collapses like First Guardian or Shield. Then there are what’s called special levies, which are spread across the sector, and that’s really up to ministerial discretion.
When I’ve had to look at such special levies in the past, I’ve tried to balance 2 things. One is that you want to spread it quite thin, quite widely, because you don’t want it to be too burdensome on any particular sector. But you also want to apply a risk principle in a sense and try to ensure that, to at least some degree, you’re levying it on the sectors that were closest to the activity as possible.
Ross Greenwood:
So, this is the one thing, say for example, if it’s an industry fund and the collapse is not in an industry fund, levy the industry fund seems a little unfair as compared with if, it was in say the banking industry or if it was in say self‑managed superannuation funds.
Mulino:
So, last year was a special levy of $47 million, and that related to a number of collapses in relation to personal financial advice. So, the financial advice sector had to stump up $20 million. And then on top of that we had to figure out where do you allocate the rest of the 47. In the end, we made a determination to levy that on all retail‑facing sectors because we were conscious that if, for example, we just levied that on financial advisors, that would have been a huge burden.
But what we did was we levied it on all financial retail‑facing parts of the financial services sector, but then decided on shares based upon ASIC regulatory efforts. So, there was a sense, a risk‑based component to it. So, that meant that financial advisers paid a fair share of that additional burden, but that the banks, the big super funds and the insurers and financial markets also kicked in, which was in a sense a reflection of their capacity to pay.
Greenwood:
But there’s a reality here right now that is the collapse of First Guardian, end of Shield, which is $1 billion, it’s big money. And so it raises questions about the solvency of that fund of compensation of last resort. But it also then goes to that same issue that we’re talking about: who pays?
Mulino:
Yes. So, firstly, there’s no question of the solvency. The Compensation Scheme of Last Resort will be able to provide people with that backstop. So, people who are able to achieve findings in AFCA in their favour, they will get up to the 150, depending on how much that determination is.
Greenwood:
There’s one thing about that, though. Some companies who had those funds on their platform have decided that they will pay their clients. Others have chosen not to. So, they have to go through AFCA to try and get the $150 grand.
Mulino:
Exactly. So, that goes to a broader question, which is that in addition to putting out some policy ideas around how to make the CSLR or the Compensation Scheme of Last Resort more workable, we’ve put out some serious ideas to beef up consumer protection to make sure that we reduce the likelihood of these big collapses.
Greenwood:
I’m going to ask you about that, how do you do that? Because surely we see collapses during every economic cycle, and there’s either crooks turn up or something structurally not built right, and some of these things. How do you try and put the safeguards to ensure there’s no collapse in the future? Because I’ve heard treasurers say that for years and years.
Mulino:
So, there are a few key levers. We’re putting quite a few ideas out there because this is a complex area. One of the areas is to say that the platforms where a lot of the choice is given effect to, should undertake stronger due diligence of the various investments on there.
Secondly, that there should be more visibility of the regulator into some of these managed investment schemes, and that will help ensure that they can reach in sooner. And then there are some reforms around switching, to give consumers a bit more time to have a second thought.
So, there’s a range of levers that we’re pulling there. There’s a whole discussion paper around the regulation of lead generators. So, these people who call you up out of the blue, often with quite dodgy ideas, we’re going to regulate them more. And we’re just looking at specifically what might work there.
Greenwood:
Because that’s been one big issue, the lead generators. Hey, change your super fund over. We’ve got a better deal for you. It’s you beaut, whatever it might be, but whatever it might be, and, you know, somehow there’s a payment going on behind the scenes to encourage that person to try and encourage me to change my super fund.
Mulino:
Yeah, and at the moment, to some degree, they’re covered by broad consumer laws. But there’s a real argument that we’re going to look into in detail as to whether or not they should be covered by AFSL licences or the financial sector law in particular. And there’s a good argument that given the quantum of the decisions that people are making, they’re talking often about switching their entire life savings, that kind of regulatory arrangement is more appropriate. There’s also potentially restrictions you might put on lead generators in relation to conflicted remuneration or other aspects of the way they operate.
Greenwood:
Ok, there’s one other aspect of this, and that is you’re looking right now for submissions from the industry, from consumers, no doubt, to see how this lands ultimately. How long have they got to put their submission in for you?
Mulino:
So, they’ve got 6 weeks from the issue, so until mid‑May, which reflects the fact that this is a complex area. Look, a number of the participants in the sector have been talking about these issues for some time, so we want to give people enough time to seriously consider this. But we also don’t want to let this drag on. I’m wanting to lean into this because I’ve met a lot of the victims of First Guardian and Shield. I’m conscious that this is a really important matter that we need to take action on as a priority.
Greenwood:
Dan Mulino, good to chat to you. Many thanks for your time.
Mulino:
Thanks for having me.