Following the federal government’s response to the banking royal commission’s final report and 76 recommendations, Prime Minister Scott Morrison and Treasurer Josh Frydenberg announced that over 300 consumers and small businesses would “finally receive compensation totalling around $30 million as a consequence of prior misconduct”.
In its response to the final report, the government announced it was going beyond the recommendations of the commission to ensure that it is “restoring trust in our financial system and delivering better consumer outcomes, while maintaining the flow of credit and continuing to promote competition”.
The additional actions that the government will be taking include compensating those individuals who had a prior unpaid determination in their favour from the former ombudsman services, the Financial Ombudsman Service and the Credit and Investments Ombudsman, which have since been rolled into the Australian Financial Complaints Authority (AFCA).
The government said it would fund the payment of the legacy unpaid determinations from the two services, adding that the 2017 Ramsay Review had previously found that there was a strong case for these determinations to be paid. According to this review, there was “clear evidence” that not all licensees were meeting their obligations, resulting in some consumers and small businesses missing their EDR awards.
According to the review, failure to pay compensation was concentrated mainly in the financial advice sector.
The government has therefore committed to not only paying the outstanding compensation, but also establish a compensation scheme of last resort (CSLR) and expand the remit of the AFCA so that it can award compensation for successful claims going back 10 years, consistent with the period examined by the royal commission.
The government response to the royal commission’s final report reads: “The government agrees to establish an industry-funded, forward-looking compensation scheme of last resort (CSLR). The scheme will be designed consistently with the recommendations of the Supplementary Final Report of the review of the financial system external dispute resolution framework (Ramsay Review) and will extend beyond disputes in relation to personal financial advice failures.
“For there to be confidence in the financial system’s dispute resolution framework, it is important that where consumers and small businesses have suffered detriment due to failures by financial firms to meet their obligations, compensation that is awarded is actually paid.”
It continued: “The CSLR will operate as a last resort mechanism to pay out compensation owed to consumers and small businesses that receive a court or tribunal decision in their favour or a determination from AFCA but are unable to get the compensation owed by the financial firm – for example, because the firm has become insolvent.”
The CSLR will be established as part of AFCA, which will also have an “enhanced” role in the establishment and public reporting of firm remediation activities.
Further to the compensation schemes, the Treasurer said that government would also be “extending the jurisdiction of the Federal Court to cover corporate criminal misconduct, which will expedite cases that are considered by state courts and commonly take over two years to be heard”.
A new directions power will also be provided to the Australian Securities and Investments Commission (ASIC) “to direct firms to undertake remediation activities” where misconduct occurred, as outlined in the government’s response.
Mr Frydenberg added: “Additional funding of $170 million has also been provided to ASIC, APRA, the Commonwealth Director of Public Prosecutions and the Federal Court to ensure our regulators are appropriately resourced to hold those who engage in misconduct to account.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.