House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Chapter 1: Financial services compensation scheme of last resort

Outline of chapter

1.1 This Chapter describes the establishment and operation of the CSLR. All legislative references in this Chapter are to the Corporations Act, unless otherwise stated.

Context of amendments

1.2 The Australian financial system is central to the Australian economy and plays an essential role in promoting economic growth and stability. 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.

1.3 The first comprehensive review of the financial system external dispute resolution framework was commissioned in April 2016. The Ramsay Review was undertaken by an expert panel chaired by Professor Ian Ramsay and recommended a new financial system dispute resolution framework. AFCA was established in response, and it commenced operations on 1 November 2018.

1.4 AFCA provides independent external dispute resolution and deals with consumer complaints against relevant entities. AFCA is a one-stop shop for most complaints concerning insurance, banking, credit and superannuation; and provides an alternative to going to court. AFCA is empowered by the law to make binding determinations requiring relevant entities to compensate consumers.

1.5 In February 2017, the expert panel was asked to make recommendations on the establishment, merits and possible design of a financial services CSLR. A Supplementary Final Report was provided on 6 September 2017.

1.6 The Supplementary Final Report to the Ramsay Review observed that existing arrangements were not adequate to ensure that users of the financial system were compensated for losses where an external dispute resolution scheme, tribunal or court makes a finding of misconduct and a subsequent award in favour of the consumer. This issue is compounded in situations of insolvency as consumers who are awarded damages by a court, or who are entitled to a payment following a determination from AFCA, are ranked as unsecured creditors.

1.7 As such, the Supplementary Final Report to the Ramsay Review recommended that a CSLR be established in Australia.

1.8 The Financial Services Royal Commission Final Report later recommended that the three principal recommendations made in the Supplementary Final Report should be carried into effect.

Summary of new law

1.9 The objective of the CSLR is to provide compensation to eligible consumers in circumstances where an AFCA determination awarding monetary compensation has been made in their favour, but which the relevant entity has not paid.

1.10 The Minister may authorise a person to be the operator of the CSLR if the Minister is satisfied that the person will meet the mandatory requirements. This includes that the operator is a company limited by guarantee and not operated for profit.

1.11 A consumer who has not been paid in accordance with a relevant AFCA determination may apply to the operator of the CSLR for payment. If the eligibility criteria are met, the operator of the CSLR must compensate the consumer, up to $150,000.

Detailed explanation of new law

Key definitions

1.12 The Treasury Laws Amendment (Financial Services Compensation Scheme of Last Resort) Bill 2023 includes the following definitions.

1.13 Note, Table 1.1 does not include terms defined in the Financial Services Compensation Scheme of Last Resort Levy Bill 2023 or the Financial Services Compensation Scheme of Last Resort Levy (Collection) Bill 2023 (see Table 2.1).

Table 1.1 Key definitions

[Item 1, section 9]

Establishment of the CSLR operator

1.14 The CSLR is established by Division 1 of Part 7.10B of the Act. [Item 3, section 1059]

Minister may authorise the CSLR operator

1.15 The Minister may, by notifiable instrument, authorise a person to operate the CSLR if the Minister is satisfied that the person will meet the mandatory requirements. The authorisation must specify the day the authorisation comes into force and may impose any conditions relating to the authorisation. [Item 3, section 1060]

1.16 It is appropriate for the Minister to be empowered to authorise the operator of the CSLR as it enables the Minister to consider the specific needs of the scheme and authorise an operator that is best placed to administer the scheme effectively and responsibly.

1.17 Once authorised, the operator of the CSLR is to be known as the CSLR operator. [Item 3, section 1060]

1.18 The Minister may also:

•

vary or revoke the CSLR operator's authorisation; and

•

impose, vary or revoke conditions relating to the authorisation. [Item 3, section 1060]

1.19 There can only be one CSLR operator at any given time. This means that an authorisation of a person as the CSLR operator may not take effect while the authorisation of another person as the CSLR operator is in force. [Item 3, section 1060]

1.20 The Minister's power to make a notifiable instrument authorising a person as the CSLR operator (including the power to vary or revoke that authorisation, or to impose, vary or revoke conditions on that authorisation) is appropriate as it is administrative (not legislative) in character and does not alter the operation of the law. Before the Minister is able to exercise this power to authorise a person as the CSLR operator, the Minister must be satisfied that the person will meet the mandatory organisational, operator, operational and compliance requirements. This requirement also ensures transparency by requiring the instrument to be publicly available on the Federal Register of Legislation.

Mandatory requirements for the CSLR operator

1.21 The mandatory requirements that apply to the CSLR operator are grouped into four categories:

•

organisational;

•

operator;

•

operational; and

•

compliance. [Item 3, section 1062]

Organisational requirement

1.22 The organisational requirement is that the CSLR operator must not charge a fee to a consumer seeking compensation, nor require the consumer to pay a fee or charge to any other entity in relation to their application. This reflects the intent that the CSLR is free for consumers. [Item 3, section 1062]

Operator requirements

1.23 The person authorised to be the CSLR operator must be a company limited by guarantee and operate on a not-for-profit basis (which must be stated in the operator's constitution). [Item 3, section 1062]

1.24 The CSLR operator's constitution must also provide that:

•

amounts paid to the operator by the Commonwealth must be maintained for the purpose of the CSLR;

•

the Chair of the operator's board must be an independent person appointed by the Minister as a member of the board; and

•

within 6 months after the operator's authorisation a director of AFCA (or the Chair of the AFCA board) and a Fellow of the Institute of Actuaries of Australia (who has at least 5 years' experience in actuarial analysis) must be appointed to the board of the CSLR operator. [Item 3, section 1062]

1.25 The Minister's appointment of an independent member as the Chair of the CSLR operator's board must be made by written instrument. Consistent with the Legislation (Exemptions and Other Matters) Regulation 2015 an instrument of appointment is not a legislative instrument. [Item 3, section 1061]

1.26 The requirement for a director or Chair of the AFCA board to be a member of the CSLR operator's board recognises the importance of a close and effective working relationship between the CSLR operator and AFCA.

1.27 The requirement for an actuarial expert to be a member of the operator's board reflects the importance of this discipline to the role of the CSLR operator noting that the CSLR operator must have regard to actuarial principles in estimating and working out claims, fees and costs estimates to be payable for each levy period.

Operational requirements

1.28 The operational requirements provide that the CSLR operator must:

•

operate in accordance with its constitution;

•

administer the CSLR in accordance with the law (Part 7.10B of the Act and any regulations made under that Part of the Act);

•

manage money in a manner that is efficient, effective and economical; and

•

have appropriate expertise to deal with applications for compensation and to undertake actuarial analysis and modelling to estimate the value of claims to be made under the CSLR. [Item 3, section 1062]

1.29 The requirement for the CSLR operator to manage money in a manner that is efficient, effective and economical is intended to be interpreted in accordance with the ordinary meaning of these terms in the context. For example, efficient operation involves achieving appropriate value for money, effective operation involves an assessment of the extent to which spending achieves the intended outcomes, and economical operation generally relates to minimising cost.

Compliance requirements

1.30 If the authorisation of the CSLR operator is subject to any conditions imposed by the Minister, the operator must comply with these conditions, as well as any other requirements relating to compliance with the mandatory requirements issued to the operator by ASIC. [Item 3, sections 1062 and 1069K]

Compensation payments under the scheme

1.31 Division 2 of Part 7.10B of the Act provides for the payment of compensation under the CSLR, including the requirements for making an application, eligibility for compensation, and the amount of compensation to be paid.

1.32 The CSLR operator cannot consider the merits or facts of a dispute between a consumer and an AFCA member underpinning a relevant AFCA determination. Rather, the CSLR operator must make a compensation payment to a consumer if:

•

a relevant AFCA determination has been made in favour of the consumer;

•

the consumer is eligible for compensation;

•

the consumer makes an application for compensation under the CSLR; and

•

the consumer accepts the CSLR operator's offer of compensation. [Item 3, section 1063]

1.33 If all of the conditions for payment of compensation are satisfied, the CSLR operator must pay the amount of compensation in a single lump sum payment (unless the Minister has made a determination requiring the compensation amount to be paid in instalments over a specified period of time). [Item 3, section 1063]

1.34 Compensation cannot be paid to a consumer before:

•

the start of the first levy period; or

•

if a later day is prescribed by regulations - that day. [Item 3, section 1063]

1.35 The regulation-making power to prescribe the day on which compensation payments can start to be made is appropriate for the effective operation of the CSLR. While a default date for making payments is prescribed in the legislation, the power to prescribe a later day in regulations provides the flexibility required to safeguard the regime by ensuring it works appropriately. The regulations would be subject to disallowance and parliamentary scrutiny.

Eligibility for compensation payments

1.36 A consumer is eligible for compensation under the CSLR if all of the following steps are satisfied:

•

a relevant AFCA determination has been made in favour of the consumer, which requires an amount to be paid by a relevant entity;

-

A consumer remains eligible for compensation even if the relevant AFCA determination has been made against an entity which no longer exists (for example, because it has been de-registered under section 601AD of the Act).

•

the consumer has notified AFCA within 12 months after the day the relevant AFCA determination was made (or a longer period agreed by AFCA) that the relevant entity has not paid the amount specified in the determination;

-

The discretion for AFCA to extend this notification period ensures flexibility in circumstances where the consumer is unable to meet the deadline (for example, in the case of relevant AFCA determinations made prior to the commencement of the CSLR).

•

where the relevant entity still exists - AFCA has taken appropriate steps to require the relevant entity to pay the specified amount and has notified the entity, in writing, that it has finished taking these steps;

•

the amount specified in the relevant AFCA determination has not been fully paid to the consumer;

•

the consumer is not eligible to receive payment under another statutory compensation scheme for the same matters covered in the determination for an amount equal to or greater than the amount in the relevant AFCA determination; and

•

the consumer makes an application to the CSLR operator for compensation for the relevant AFCA determination (which has not been withdrawn); and

-

The consumer may withdraw their application for compensation at any time before they accept an offer for compensation. If an application is withdrawn, it may be re-submitted at a later date.

•

the CSLR operator reasonably believes that the consumer is unlikely to be fully paid the amount specified in the relevant AFCA determination having regard to the relevant entity's financial position or any other reason which may be relevant. [Item 3, section 1064]

Appropriate steps by AFCA

1.37 Compensation under the CSLR is intended to be a last resort only. To reflect this, compensation is only payable after AFCA takes appropriate steps to require the amount specified in the relevant AFCA determination to be paid by the relevant entity.

1.38 AFCA is only required and able to take appropriate steps in circumstances where the relevant entity against which the determination was made still exists. This requirement does not apply if the entity has ceased to exist, for example, because it has been de-registered. [Item 3, section 1063]

1.39 In satisfying the requirement to take appropriate steps, AFCA may take one or more of the following steps, if AFCA considers them appropriate:

•

seeking an explanation from the relevant entity on why it has failed to pay the amount in accordance with the relevant AFCA determination;

•

explaining to the relevant entity the consequences of failing to comply with the determination, which include cancellation of the relevant entity's Australian financial services licence or Australian credit licence;

•

working with the relevant entity to come up with a reasonable payment plan or other alternatives; and

•

if the relevant entity commences insolvency proceedings - engaging with an officer of the Chapter 5 body corporate to assess whether the entity is able to pay the amount to the consumer. For example, if the relevant entity is to be wound up or enters administration, AFCA may engage with the liquidator or the administrator of the relevant entity. [Item 3, section 1064]

1.40 In addition to, or instead of, these steps, AFCA may take any other steps it considers appropriate and cost-effective to achieve the intended outcome of ensuring that the relevant entity pays the consumer in accordance with the determination. [Item 3, section 1064]

Relevant AFCA determination

1.41 Compensation under the CSLR is only available where a relevant AFCA determination requiring payment has been made in favour of the consumer. [Item 3, section 1063]

1.42 For the purposes of the CSLR, a relevant AFCA determination:

•

relates to a complaint made by a consumer against a relevant entity, which, at the time the complaint is made, is an AFCA member;

•

the complaint is about a particular kind of product or service; and

•

the determination requires the entity to pay an amount to the consumer (whether or not the entity still exists) and the determination is accepted by the consumer. [Items 1 and 3, sections 9 and 1065]

1.43 To be a relevant AFCA determination, the determination must relate to one or more of the following kinds of products or services:

•

engaging in credit activity as a credit provider or otherwise;

-

'Credit activity' (including when a person engages in a credit activity) and 'credit provider' are defined in the Credit Act.

•

providing financial product advice that is personal advice to a retail client about at one or more relevant financial product; and

-

'Financial product advice', 'personal advice', 'retail client' and 'relevant financial product' are defined in the Act.

•

dealing in securities for a person as a retail client, other than issuing securities.

-

'Dealing' and 'security' are defined in the Act. [Item 3, section 1065]

1.44 For the purpose of the CSLR, a relevant AFCA determination may include determinations made by AFCA before, on, or after the commencement of the CSLR. Compensation under the CSLR is intended to available for eligible complaints made to AFCA since AFCA commenced operation on 1 November 2018. [Item 2, section 1058B]

Applying for compensation payments

1.45 It is not the CSLR operator's role to proactively monitor the status of relevant AFCA determinations, to determine whether or not compensation is available. Instead, a compensation payment is only available if the consumer makes an application for compensation to the CSLR operator.

1.46 A consumer seeking compensation for a relevant AFCA determination may make an application, in the approved form, to the CSLR operator. [Item 3, section 1066]

1.47 The CSLR operator may approve a form for this purpose. [Item 3, section 1066]

1.48 An application for compensation is considered to be in the approved form if:

•

it is in the form approved by the CSLR operator;

•

it includes any information (including any declarations) required by the approved form; and

•

it is given in the manner required by the CSLR operator. [Item 3, section 1066]

1.49 As part of the application process, the consumer may be required to declare any payments they have received from the relevant entity in accordance with the relevant AFCA determination, for example, this could include a partial payment from the relevant entity or an amount paid to the consumer as an unsecured creditor in an insolvency process.

1.50 Once an application for compensation has been lodged with the CSLR operator, the consumer may:

•

amend their application at any time before the CSLR operator makes an offer of compensation; and

•

withdraw their application at any time before they accept the CSLR operator's offer of compensation. [Item 3, section 1066]

Amount of compensation payments

1.51 The maximum amount of compensation that the CSLR may offer (and pay) to a consumer is capped at $150,000. [Item 3, section 1067]

1.52 On the other hand, the maximum compensation that may be payable under a relevant AFCA determination is $542,500. Where the relevant AFCA determination is for an amount greater than the CSLR compensation cap (that is, more than $150,000), the excess is not compensable under the CSLR. Instead, this excess remains a debt owed by the relevant entity to the consumer, which the consumer can pursue via other means outside of the CSLR.

1.53 The amount of compensation payable to a consumer for a relevant AFCA determination, is an amount equal to the lower of the following amounts:

•

$150,000; or

•

the relevant AFCA determination, less any of the following which apply:

-

any amount paid by the relevant entity in accordance with the relevant AFCA determination, such as a partial payment or a payment made to the consumer as an unsecured creditor in an insolvency process;

-

any compensation the consumer is eligible for under another statutory compensation scheme for the matters covered by the determination; and

-

any other payments made to the consumer of a kind prescribed as under regulations (if any). [Item 3, section 1067]

1.54 The regulation-making power to prescribe any other kinds of payments which the CSLR operator must take into account is necessary and appropriate as it is not possible or practical to prescribe all of the kinds of payments that should be taken into account when determining the amount of compensation payable to the consumer in primary law. Rather, given the dynamic nature of the financial system, it is essential that the regulations can prescribe additional criteria to allow the CSLR to adapt to changing circumstances. The regulations are subject to disallowance and parliamentary scrutiny.

1.55 These criteria are the only matters to which the CSLR operator may have regard in determining the amount of compensation to offer. The CSLR operator may not exercise discretion by including any additional amounts not specified in the relevant AFCA determination, such as interest payments. Similarly, the CSLR operator also does not have discretion to remove an amount for any reasons other than those prescribed by law. [Item 3, section 1067]

Offer, acceptance, notification and payment

1.56 If a consumer is found eligible for compensation for a relevant AFCA determination, the CSLR operator must make a written offer of compensation to the consumer. [Item 3, section 1068]

1.57 The offer must include the amount of compensation offered and explain the effect of the CSLR operator's right of subrogation if compensation is paid. [Item 3, section 1068]

1.58 After an offer of compensation is made, the consumer has 90 calendar days after the day the offer is made to accept the offer. The consumer must notify the CSLR operator in writing that they accept the offer. [Item 3, section 1069]

1.59 If the consumer fails to accept the offer within this timeframe, they are taken to have withdrawn their application for compensation. However, if required, the consumer may make another application for compensation. [Item 3, section 1069]

1.60 If the consumer accepts the offer of compensation within this timeframe, the CSLR operator must pay the amount of compensation in a single lump sum (unless the Minister has made a determination requiring the compensation payment to be made in specified instalments over a specified period of time). [Item 3, sections 1063 and 1069H]

1.61 At any time before the consumer accepts the offer, the CSLR operator may vary or revoke the offer, if the operator reasonably believes that:

•

there is an error relating to the offer;

•

there is fraud relating to the offer;

•

there is a change in circumstances affecting either:

-

the consumer's eligibility for the amount of compensation in the offer; or

-

the amount of compensation in the offer; or

•

other exceptional circumstances exist that justify the variation or revocation. [Item 3, section 1068]

1.62 For example, an offer of compensation may be varied where, after the offer is made (but before it is accepted), the consumer receives a partial payment in accordance with the relevant AFCA determination as an unsecured creditor to an insolvency process. In this circumstance, the consumer may no longer be eligible for the full amount offered.

1.63 An example of exceptional circumstances that may warrant an offer of compensation being varied or revoked is where the CSLR operator receives additional information relating to the legality of arrangements. For example, where the CSLR operator finds that an Enduring Power of Attorney arrangement does not give an appointed attorney the necessary authority to seek the compensation on behalf of the consumer.

1.64 The CSLR operator's discretion to vary or revoke an offer of compensation is limited and cannot be exercised for reasons other than those prescribed in the law.

1.65 Merits review is not available in relation to the CSLR operator's decision to vary or revoke an offer. However, while the decision to vary or revoke an offer involves the exercise of limited discretion on the part of the CSLR operator, this discretion is necessarily restricted to situations that relate to the integrity and proper administration of the scheme.

1.66 If the consumer is unsatisfied with the CSLR operator's original or varied offer of compensation, they can choose not to accept the offer. At this point, the consumer can pursue other options for obtaining payment in accordance with the relevant AFCA determination (for example, by becoming an unsecured creditor in the liquidation of the relevant entity) or make another application for compensation to the CSLR operator.

1.67 If a consumer has submitted an application for compensation but is found not to be eligible, the CSLR operator must notify that consumer, in writing, as soon as reasonably practicable, that they are not eligible for compensation and the reasons why they are not eligible. [Item 3, section 1068]

Subrogation of rights

1.68 The CSLR operator may, in certain circumstances, have the right to recover some or all of the compensation paid to the consumer for a relevant AFCA determination from the relevant entity against which the determination was made.

1.69 If the CSLR operator pays compensation for a relevant AFCA determination and the relevant entity (against which the determination was made) is (or was at the time the complaint was made) an AFCA member that is, or becomes, a Chapter 5 body corporate, the CSLR operator is subrogated the rights or remedies that the consumer would otherwise have had against the relevant entity. [Item 3, section 1069A]

1.70 Section 9 of the Act defines a 'Chapter 5 body corporate' as a body corporate (company) that:

•

is being wound up;

•

is a CCIV of which one or more sub-funds is being wound up;

•

in respect of property of which a receiver, or a receiver and manager, has been appointed (whether or not by a court) and is acting;

•

is under administration;

•

has executed a deed of company arrangement that has not yet terminated;

•

is under restructuring;

•

has made a restructuring plan that has not yet terminated; or

•

has entered into a compromise or arrangement with another person the administration of which has not been concluded.

1.71 Subrogation of rights provides that the CSLR has any rights or remedies against the relevant entity to the extent of the compensation amount paid as recognised by an officer of the Chapter 5 body corporate (for example, an external administrator or liquidator). [Item 3, section 1069A]

1.72 The CSLR operator is not subrogated these rights where the relevant entity against which the determination is made is not a Chapter 5 body corporate (for example, because the relevant entity is not a body corporate).

1.73 In practice, this means:

•

the consumer no longer has any rights or remedies against the relevant entity for the amount of compensation they are paid by the CSLR operator for the relevant AFCA determination;

•

the consumer's rights and remedies against the relevant entity (for the amount of compensation paid) are transferred to the CSLR operator, which means that the CSLR operator may be able to recover some or all of the compensation paid under the CSLR from the relevant entity (for example, as an unsecured creditor in insolvency proceedings); and

•

if the relevant AFCA determination exceeds the amount of compensation paid under the CSLR, the consumer retains their rights and remedies against the relevant entity for the excess.

1.74 The purpose of this provision is to enable the CSLR operator, in certain circumstances, to recover some or all of the compensation paid on behalf of the relevant entity. It is also intended to prevent situations where the consumer is paid more than the amount specified in the relevant AFCA determination by receiving a compensation payment under the CSLR and a payment as a creditor to an insolvency process.

AFCA Fees

1.75 AFCA incurs costs in assessing complaints (whether or not it makes a determination for compensation). Generally, these costs are required to be paid by the relevant entity against which a complaint has been made. These fees and charges are central to AFCA's ongoing operation and sustainability.

1.76 However, there are instances where a relevant entity does not, or is unable to, pay AFCA's fees. For example, this could occur if the relevant entity becomes insolvent.

1.77 Where AFCA's fees are not paid by the relevant entity (for whatever reason), the CSLR operator is required to pay to AFCA an amount equal to AFCA's unpaid fees (calculated on a monthly basis). This applies in relation to all unpaid fees and charges for complaints within the scope of the CSLR, regardless of whether the complaint is determined in favour of the consumer or the relevant entity. [Item 3, sections 1069B and 1069C]

1.78 The CSLR operator's payment of AFCA's unpaid fees is funded by an industry levy.

1.79 'AFCA's unpaid fees' for a month are the fees (however these fees are described):

•

that relate to one or more complaints that have been finalised by AFCA, each of which is made against a relevant entity which, at the time the complaint was made, was an AFCA member and is a complaint about a particular kind of product or service;

•

AFCA has charged to the (current or former) AFCA member - or would have done so if the relevant entity still existed;

•

that have not been paid; and

•

AFCA has finished taking appropriate steps to recover the fees from the relevant entity (see paragraphs 1.37 to 1.40). [Item 3, section 1058B]

1.80 'AFCA's accumulated unpaid fees' are the same as 'AFCA's unpaid fees', except that they only relate to fees that became due and payable between 1 November 2018 and 7 September 2022 (the day before the accumulation recovery day). AFCA fees become due and payable after AFCA has finished taking appropriate steps to recover these fees from the relevant entity. [Item 3, section 1058B]

1.81 'AFCA unpaid fees' and 'AFCA accumulated unpaid fees' are intended to include all AFCA's fees and charges (however these fees or charges are described) the relate to the assessment of one or more eligible complaints. This includes complaint fees, the user charge, and any other fees that may apply.

1.82 For 'AFCA's unpaid fees', AFCA must notify the CSLR operator, in writing, of the fee amount as soon as practicable after the end of each month on or after the accumulation recovery day (8 September 2022). The CSLR operator must pay AFCA's unpaid fees as soon as reasonably practicable after being notified of this amount by AFCA. However, payment cannot begin before the start of the first levy period (or a later day prescribed by regulations). [Items 2 and 3, sections 1058B and 1069B]

1.83 Similarly, for 'AFCA's accumulated unpaid fees', AFCA must notify the CSLR operator, in writing, of the fee amount as soon as reasonably practicable after the accumulation recovery day (8 September 2022). The CSLR operator must pay AFCA's accumulated unpaid fees as soon as reasonably practicable after being notified of this amount by AFCA. However, payment cannot begin before the start of the first levy period (or a later day prescribed by regulations). [Items 2 and 3, sections 1058B and 1069C]

1.84 The regulation-making powers to prescribe the day on which payments can begin to be made to AFCA is necessary for the effective operation of the CSLR. While a default day for making payments is prescribed in the legislation, the power to prescribe a later day in regulations provides the flexibility required to safeguard the regime by ensuring it works appropriately. The regulations are subject to disallowance and parliamentary scrutiny.

Powers of the CSLR operator

Information gathering

1.85 The CSLR operator may obtain information and documents relevant to an application for compensation.

1.86 If the CSLR operator has a reasonable belief that a person is capable of giving information or producing documents that are relevant to an application for compensation, the operator may give that person a written notice requiring them to give this information (in writing) or produce those documents within the period specified in the notice. [Item 3, section 1069D]

1.87 The notice given by the CSLR operator must state what information is required to be given, or documents are required to be produced, and when that information or those documents, are required to be provided. The day specified in the notice must be at least 14 days after the day the notice is given. [Item 3, section 1069D]

1.88 If documents are required to be produced, the CSLR operator may:

•

take possession of the documents and make copies or take extracts from the documents;

•

keep the documents for as long as necessary to deal with the application for compensation; and

•

permit a person (who is entitled to do so) to inspect the document at all reasonable times. [Item 3, section 1069D]

1.89 This power for the CSLR operator to require a person to give information or produce documents does not apply to ASIC (that is, the CSLR operator cannot compel ASIC to give information or produce documents). [Item 3, section 1069D]

1.90 Unless the person has a reasonable excuse, a person who fails to comply with a notice issued by the CSLR operator to give information or produce documents commits an offence of strict liability. The maximum penalty for this offence is 30 penalty units. [Item 3, section 1069D]

1.91 A failure to provide this information could affect the CSLR operator's ability to efficiently and effectively to determine the consumer's eligibility for compensation and the value of that compensation (if applicable). Having strict liability apply to this offence is intended to deter non-compliance by ensuring that regulators can efficiently and expeditiously deal with low-level offending. This, in turn, bolsters the integrity of the CSLR and maintains public confidence in the regime.

1.92 This strict liability offence is consistent with the Guide to Framing Commonwealth Offences, which states that the maximum penalty for a strict liability offence should not exceed 60 penalty units for an individual and 300 penalty units for a body corporate. Furthermore, the use of strict liability (rather than absolute liability) preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.

1.93 The defence of 'reasonable excuse' is available to a person who has not complied with a notice issued by the CSLR operator to give information or produce documents. Under subsection 13.3(3) of the Criminal Code, a defendant bears an evidential burden to prove that they have a reasonable excuse. Whether the person has a reasonable excuse for not complying with this notice is a matter peculiarly within the knowledge of the defendant. It would be significantly more difficult and time-consuming for the prosecutor to disprove the existence of these defences, than it would be for the defence to establish the matter.

1.94 In accordance with subsection 13.3(3) of the Criminal Code Act 1995, a defendant who wishes to rely on this defence bears an evidential burden in relation to that matter. If the defendant discharges this evidential burden, the prosecution must prove those matters beyond a reasonable doubt.

1.95 If the person who fails to comply with the CSLR operator's notice is, or was, a member of AFCA, the operator must notify AFCA and ASIC of the person's failure to comply with the notice. [Item 3, section 1069D]

Information Sharing

1.96 A CSLR staff member may use or disclose information or documents obtained by a CSLR staff member if:

•

the use or disclosure is for the purpose of:

-

Part 7.10A or Part 7.10B of the Act;

-

the Financial Services Compensation Scheme of Last Resort Levy Act 2023; or

-

Financial Services Compensation Scheme of Last Resort Levy (Collection) Act 2023; or

•

the use or disclosure is to any of the following persons or entities for the purposes of assisting that person or entity to perform its functions or exercise its powers:

-

ASIC;

-

AFCA;

-

the Information Commissioner; or

-

the Commissioner of Taxation. [Item 3, section 1069E]

1.97 An AFCA staff member may use or disclose information or documents obtained by an AFCA staff member under, or for the purposes of, Part 7.10A of the Act if:

•

the use or disclosure is for the purposes of Part 7.10A or 7.10B of the Act, the Financial Services Compensation Scheme of Last Resort Levy Act 2023, or the Financial Services Compensation Scheme of Last Resort Levy (Collection) Act 2023; or

•

the disclosure is to the CSLR operator for the purpose of assisting the operator to perform its functions or exercise its powers. [Item 2, section 1058A]

1.98 Use or disclosure of information by an AFCA staff member includes, making a record of the information, disclosing the information, producing the relevant document or permitting access to the document. [Item 2, sections 1058A]

1.99 ASIC may use or disclose information for the purpose of assisting the CSLR operator perform its functions or exercise its powers. [Item 5, section 127 of the ASIC Act]

Reporting of compensation paid by CSLR operator

1.100 If the CSLR operator makes a compensation payment for a relevant AFCA determination (where the determination has been made against an entity that is or was an AFCA member), the operator must notify ASIC of the details of the AFCA member and of its failure to comply with the relevant AFCA determination. [Item 3, section 1069F]

1.101 Also, if the CSLR operator pays compensation for a relevant AFCA determination (where the determination is made against an entity that is or was an AFCA member), and becomes aware that the entity is a Chapter 5 body corporate, the operator must notify an officer of the Chapter 5 body corporate (for example, a liquidator or an administrator) in writing of the amount of compensation paid. [Item 3, section 1069F]

1.102 This notification is intended to ensure that the officer of the Chapter 5 body corporate is aware of the debt paid on behalf of the company, the CSLR operator's subrogated right to remedies to the extent of the compensation paid, and the remaining debt (if any) owed to the consumer.

1.103 The CSLR operator must, as soon as reasonably practicable after the end of each levy period, prepare a report for that levy period. The CSLR operator's report must contain the information prescribed by regulations and be published on the operator's website. [Item 3, section 1069G]

1.104 The regulation-making power to prescribe the content of the CSLR operator's report is necessary and appropriate to ensure that the contents of reports are flexible and relevant in the context of the operating environment. The content of these reports may need to be adjusted over time to better reflect the operation of the CSLR regime. The regulations are subject to disallowance and parliamentary scrutiny.

Powers of the Minister

1.105 The CSLR is intended to be funded by an industry levy to be imposed on parts of financial services industry.

1.106 To ensure the sustainability of the CSLR and the industry, the law sets the following caps on the levy amount payable for a levy period:

•

scheme levy cap - the total amount of levy that may be imposed for any levy period across all persons across all sub-sectors; and

•

sub-sector levy cap - the total amount of levy that may be imposed for the second levy period (or a later levy period), across all members of a particular sub-sector.

1.107 For a levy period, the CSLR operator may make:

•

an initial claims, fees and costs estimate for a levy period and a sub-sector - this sets out the levy amount payable for a levy period and a sub-sector; and

•

a revised claims, fees and costs estimate for a levy period and a sub-sector - this estimate (if required) may result in the imposition of a further levy being imposed for the levy period and the sub-sector.

1.108 If the CSLR operator works out that a revised estimate for the levy period for a sub-sector could cause the sub-sector levy cap for the levy period and the sub-sector to be exceeded, the CSLR operator must notify the Minister of this as soon as reasonably practicable. This notification must include any information prescribed by the regulations. Item 3, section 1069F]

1.109 The regulation-making power is appropriate because the information that should be included in a notice to the Minister needs to be flexible to take into the account any relevant circumstances. The types of information that may be prescribed by regulations for the purpose of this notification may include information about the affected sub-sector, the number and size of expected complaints, the possible impact of the revised estimate on the financial system, and any other information required to assist the Minister in making the determination. The regulations are subject to disallowance and parliamentary scrutiny.

1.110 If the Minister receives a notification from the CSLR operator about a revised estimate, the Minister may make a determination (by legislative instrument) for the levy period and the sub-sector (or one or more specified sub-sectors). [Item 3, section 1069H]

1.111 The determination may:

•

provide that compensation payments made to consumers in a specified class must be paid in specified instalments over a specified period of time (rather than in a single lump sum);

•

provide for the imposition of a special levy for the levy period across all members of the primary sub-sector (the sub-sector for which the revised claims, fees and costs estimate was made). The determination must state the amount of special levy payable for the levy period; and

-

The amount of special levy payable must not be more than the difference between the revised estimate and the total levy amount already paid for the levy period by the sub-sector.

•

provide for the imposition of a special levy for the levy period that applies to more than one sub-sector (not just the primary sub-sector) - the Minister may only do this if he or she is satisfied that it is necessary to do so due to the number and size of compensation payments required to be paid in the levy period and that this is the most effective way of enabling timely payment of compensation to those consumers.

-

The determination must specify the sub-sectors that the special levy is to be imposed on and the special levy amount.

-

In making this determination, the Minister must have regard to the impact of the special levy amount on the financial sustainability and viability of the specified sub-sectors and on the financial system more broadly.

-

The amount of special levy specified in the determination must not be more than the difference between the revised estimate for the levy period and the primary sub-sector and the total amount of levy already paid. [Item 3, section 1069H]

1.112 These guiding principles are intended to ensure that the Minister's power to impose a special levy for the levy period on one or more specified sub-sectors is only exercised where there is a genuine need to do so, and takes into account any adverse impacts the levy may have on the sustainability and viability of the specified sub-sectors and the Australian financial system more broadly. In this way, the Minister's power to impose a special levy is a necessary intervention to deal with circumstances where the annual levy is insufficient (or likely to be insufficient) to meet the demand for compensation payments in a particular levy period.

1.113 The Minister's determination must be made by legislative instrument, which is subject to disallowance and parliamentary scrutiny. [Item 3, section 1069H]

1.114 The purpose of the determination is to enable the Minister to select an appropriate mechanism for dealing with higher than expected costs for a levy period. However, the Minister's power to intervene is limited to the three mechanisms prescribed in the primary law.

1.115 This ensures that the CSLR is able to operate with sufficient safeguards in an evolving and dynamic financial system, while being responsive to unforeseen events. It is not possible to provide such safeguards in primary law given the need for timely action in response to these events, as they unfold.

1.116 Further, the Minister's power to make a determination is constrained with reference to the principles outlined in the Ramsay Review, which ensures the scheme is designed to limit reliance on ad-hoc funding through a carefully calibrated levy calculation methodology, and by specifying the circumstances in which a Ministerial determination may be made.

Regulating the CSLR operator

1.117 A person authorised to operate the CSLR scheme must ensure that they comply with the mandatory organisational, operator, operational and compliance requirements. [Item 3, section 1069J]

1.118 ASIC may make a legislative instrument issuing a direction to the CSLR operator relating to its compliance with the mandatory requirements. [Item 3, section 1069K]

1.119 If ASIC considers that the CSLR operator has not done all things reasonably practicable to ensure compliance with the mandatory requirements or a condition of the authorisation imposed by the Minister, ASIC may give the operator a written notice of its intention to give the CSLR operator a formal direction. [Item 3, section 1069L]

1.120 A notice of ASIC's intention to give a formal direction (the first notice) must set out the specific measures that the formal direction would require the CSLR operator to take and the reasons for ASIC's intention to give such a direction. [Item 3, section 1069L]

1.121 If, after the first notice is given to the CSLR operator, the operator has not taken the specific actions in the notice, and ASIC considers that it is appropriate to do so, ASIC may give the CSLR operator the formal direction and a statement for reasons for giving the direction. [Item 3, section 1069L]

1.122 If ASIC gives the CSLR operator a formal direction, it must specify the timeframe for compliance with the direction. This timeframe must be reasonable. What is reasonable depends on the circumstances of the case. [Item 3, section 1069L]

1.123 A direction given by ASIC is not a legislative instrument. A direction would not be a legislative instrument within the meaning of section 8 of the Legislation Act 2003 and is intended as a clarification (not as an exemption) to that Act. A direction given by ASIC is administrative in character and sets out the actions the CSLR operator must take to comply with their obligations under the law. [Item 3, section 1069L]

1.124 The CSLR operator must comply with a direction given by ASIC. A failure to comply with a direction is an offence. The maximum penalty for this offence is 100 penalty units for an individual and 1,000 penalty units for a body corporate. Penalty amounts apply in relation to each day, or part of a day, in relation to which the offence is committed. [Items 3 and 18, section 1069L and Schedule 3]

1.125 ASIC may apply to the court for an order requiring the CSLR operator to comply with the direction, and the court may order the operator to comply with the direction. [Item 3, section 1069L]

1.126 A direction given by ASIC has effect until it is revoked by ASIC. [Item 3, section 1069L]

1.127 ASIC may vary or revoke a direction by giving written notice to the CSLR operator. ASIC may revoke a direction if, at the time of revocation, ASIC considers that the direction is no longer necessary or appropriate. [Item 3, section 1069L]

Financial matters

Levy for the first levy period

1.128 The first levy period begins on the day specified in a determination made by the Minister and ends on 30 June 2024.

1.129 The costs for the first levy period are to be funded by the Commonwealth. For all subsequent levy periods, the levy amount for the levy period is required to be paid by parts of the financial services industry.

1.130 For the first levy period, the CSLR operator may, by notifiable instrument, make an initial estimate of the levy amount for the levy period and a sub-sector. A single notifiable instrument may be used to determine estimates for multiple sub-sectors. [Item 3, section 1069M]

1.131 The CSLR operator's determination for the first levy period must include the amounts that the CSLR operator reasonably believes (having regard to the actuarial principles) will be:

•

the total amount of compensation payable for the levy period for the sub-sector (other than for pre-CSLR complaints);

•

the sum of AFCA's unpaid fees for each of the months that end on, and after, 8 September 2022, but before the second levy period (other than fees relating to pre-CSLR complaints);

•

the capital reserve establishment contribution for the first levy period, which is equal to approximately one-third of the capital reserve for the CSLR; and

•

the CSLR operator's administrative costs for the first levy period. [Item 3, section 1069M]

1.132 The use of a notifiable instrument for the estimated costs for the first levy period is considered appropriate given that it applies only to the Commonwealth. However, the use of a notifiable instrument also ensures transparency by requiring the instrument to be publicly available on the Federal Register of Legislation.

1.133 When the instrument estimating the costs for first levy period comes into force, the Commonwealth must pay this amount to the CSLR operator. [Item 3, section 1069N]

1.134 The Commonwealth must pay the CSLR operator the amount specified in the determination for the first levy period. The payment is to be made for the following purposes:

•

the payment of compensation during the first levy period (other than for pre-CSLR complaints);

•

the payment of AFCA's unpaid fees (other than for pre-CSLR complaints);

•

the establishment of a capital reserve; and

•

the administrative costs expected to be incurred by the CSLR operator for the first levy period. [Item 3, section 1069N]

1.135 As soon as reasonably practicable after the first levy period, the CSLR operator may determine the revised costs for the first levy period. This determination must be made by notifiable instrument and include all of the same matters that were included in the initial estimate for the first levy period. [Item 3, section 1069M]

1.136 The CSLR operator's role as the estimator of claims, fees and costs is central to the design of the CSLR levy framework. If the operator makes a determination of revised costs for the first levy period, it is appropriate for this to be made by a notifiable instrument as the information it contains is administrative (not legislative) in character and does not alter the law or require the imposition of a levy. The use of a notifiable instrument also ensures transparency by requiring the instrument to be publicly available on the Federal Register of Legislation.

Payment to the CSLR operator

1.137 For the second levy period (and each subsequent levy period), persons who are required to pay the levy must pay the specified levy amount to ASIC. The levy amounts collected by ASIC are transferred to the Consolidated Revenue Fund and the Commonwealth is required to pay an amount equal to the total amount of instalments of levy collected by ASIC, as well as any late payment and shortfall penalty amounts collected, to the CSLR operator by standing appropriation from the Consolidated Revenue Fund. The amount appropriated is equal to the amount levied. [Item 3, section 1069P]

1.138 A standing appropriation is justified because the timely administration of payments is central to the operation of any compensation scheme, including the CSLR. To ensure accountability, the appropriation is constrained to a fund that consists of levies collected exclusively for the purposes of the CSLR.

1.139 Another safeguard is that payments made to the CSLR operator may only be applied for any of the following purposes:

•

for the payment of compensation to consumers (when the consumer accepts the operator's offer of compensation);

•

to pay AFCA's unpaid fees and AFCA's accumulated unpaid fees;

•

to pay the CSLR operator's administrative costs;

•

to reimburse ASIC's administrative costs; and

•

to establish and maintain a capital reserve. [Item 3, section 1069Q]

1.140 The purposes for which money paid to the CSLR operator may be applied is not intended to prevent investment of money. [Item 3, section 1069Q]

1.141 However, the CSLR operator is not permitted to invest money paid to the operator unless:

•

the money is not immediately required for the purposes of operating the CSLR (that is, for any of the prescribed purposes for which the money may be applied); and

•

the money is invested on deposit with an authorised deposit-taking institution (for example, a bank) or in securities of, or guaranteed by, the Commonwealth, a state or territory. [Item 3, section 1069R]

1.142 The limitation on investing money is not intended to prevent the CSLR operator from purchasing capital assets or expending on capital activities required to effectively administer the CSLR.

1.143 If the CSLR operator pays an amount of compensation to a consumer which is more than the amount that was properly payable to that consumer (that is, an overpayment), the CSLR operator may recover the excess as a debt due to the CSLR operator by commencing proceedings against the consumer in the Federal Court or the Federal Circuit and Family Court of Australia (Division 2) [Item 3, section 1069S]

1.144 As an alternative to court proceedings, the CSLR operator may deduct an amount equal to the overpayment from any other amount of compensation (if any) payable to that consumer. [Item 3, section 1069S]

Other Amendments

1.145 To ensure that ASIC is able to support the establishment and administration of the CSLR, ASIC has the functions and powers that are conferred on it by the Financial Services Compensation Scheme of Last Resort Levy (Collection) Act 2023. [Item 4, section 12A of the ASIC Act]

1.146 ASIC is Australia's financial services regulator and is responsible for a range of functions including issuing levy notices, collecting levies and monitoring the CSLR operator's compliance with its obligations.

ASIC's power to suspend or cancel licences

1.147 If the CSLR operator pays an amount of compensation to a consumer for a relevant AFCA determination, the operator must notify ASIC. [Item 3, section 1069F]

1.148 If ASIC is notified that the CSLR operator has paid an amount of compensation for a relevant AFCA determination, ASIC must cancel the Australian financial services licence held by the relevant entity against which the determination was made, by giving written notice to the individual, partnership, body corporate, partnership, or trust. [Items 9, 11, 13 and 15, section 915B]

1.149 Likewise, if the CSLR operator pays an amount of compensation for a relevant AFCA determination, ASIC must cancel the Australian credit licence held by the relevant entity against which the determination was made. [Item 20, section 54 of the Credit Act]

1.150 The cancellation of an Australian financial services licence or an Australian credit licence is not subject to discretion or merits review. [Items 17 and 22, section 1317C of the Corporations Act and section 327 of the Credit Act]

1.151 The unavailability of merits review is justified because the cancellation of a person's Australian financial services licence or Australian credit licence does not involve the exercise of discretion on ASIC's part, and may only occur if all of the following steps have already been taken:

•

AFCA has made a determination against the relevant entity (this involves providing the licensee with an opportunity to be heard in respect of the complaint before a determination is made);

•

the consumer notifies AFCA within 12 months after the day the determination has been made, that the relevant entity has failed to pay the amount specified in the determination;

•

AFCA takes appropriate steps to ensure that the relevant entity complies with the determination (which includes notifying the entity of the consequences of not paying and suggesting alternative payment options);

•

the consumer makes an application to the CSLR operator for compensation;

•

the CSLR operator finds the consumer eligible for compensation (which includes forming a reasonable belief that the relevant entity is unlikely to pay the amount specified in the determination) and pays an amount of compensation.

1.152 AFCA determinations involve a thorough examination of the relevant issues. AFCA members are often sophisticated, experienced and well-resourced participants. In these matters, Australian financial services or credit licence-holders have the opportunity to articulate their case and provide all relevant information, regarding the facts of the matter before AFCA.

1.153 ASIC may also suspend or cancel an Australian financial services licence held by an individual, partnership, body corporate or a trust if the licensee fails to pay, in full, at least 12 months after the due date for payment any of the following for which they are liable to pay:

•

the instalment of levy;

•

a late payment penalty in relation to the instalment of levy;

•

a shortfall penalty in relation to the instalment of levy; [Items 8, 10, 12 and 14 , section 915B]

1.154 Similarly, ASIC may also suspend or cancel a person's Australian credit licence for failing to pay the instalment of levy (and any late or shortfall penalties in relation to the instalment of levy) in full at least 12 months after the due date for payment. [Item 19, section 54 of the Credit Act]

1.155 The decision to suspend or cancel a person's Australian financial services licence or Australian credit licence is subject to merits review by the Administrative Appeals Tribunal.

ASIC's power to make banning orders

1.156 ASIC may, in writing, make a banning order against a person who is an individual who holds an Australian financial services licence or an Australian credit licence, a partner in a partnership, a body corporate or a trustee, if all of the following apply:

•

the relevant entity is required to pay an amount in accordance with a relevant AFCA determination;

•

the CSLR operator has paid an amount of compensation for the relevant AFCA determination;

•

at the time the CSLR makes the payment, the relevant entity is the individual licensee, a partner in the partnership, an officer of the body corporate or the trustee of the trust. [Items 16 and 21, section 920A of the Corporations Act and section 80 of the Credit Act]

1.157 The power for ASIC to make a banning order is subject to merits review by the Administrative Appeals Tribunal.

Deregistration and reinstatement of registration

1.158 ASIC may deregister a company if the company fails to pay, in full, at least 12 months after the due date for payment, an instalment of the levy (and any late payment or shortfall penalties in relation to that instalment of levy). [Item 6, section 601AB]

1.159 If ASIC deregisters a company for failing to pay an instalment or levy (or associated penalties), ASIC may re-instate the company's registration if:

•

the company makes an application for re-instatement of their registration; and

•

the company has paid the instalments of levy (and any late payment and shortfall penalties) in full. [Item 7, section 601AH]

Commencement, application, and machinery provisions

1.160 The Treasury Laws Amendment (Compensation Scheme of Last Resort) Act 2023 commences on the day the Act receives the Royal Assent.

1.161 The amendments in Schedule 1 to this Act commence at the same time as the Financial Services Compensation Scheme of Last Resort Levy Act 2023. However, if the Levy Act does not commence, the provisions in Schedule 1 to this Act (Treasury Laws Amendment (Compensation Scheme of Last Resort) Act 2023) also do not commence.