The Government has released the second and final report into the external dispute resolution (EDR) and complaints arrangements in the financial system (Ramsay Review). Following the release of the initial report, the government extended the terms of reference for the Ramsay Review to require the panel to:

• make recommendations on the establishment, merits and potential design of a compensation scheme of last resort (CSLR); and
• the merits and issues involved in providing access to redress for past disputes in the financial sector.

The key points of the report are briefly outlined below. The Minister for Revenue and Financial Services, Kelly O'Dwyer has indicated that the government's response to the recommendations will be deferred pending the completion of the Royal Commission.

Key Points

The report recommends:

• The establishment of a 'limited and carefully targeted' compensation scheme, to apply prospectively to disputes arising after the establishment of a CSLR.
• Initially the scheme would be limited in its application to financial advice failures provided by a relevant provider (as defined in s910A of the Corporations Act) but should be designed to enable to it to be extended in future.
• Final resort: Consumers and small businesses would have to have a decision from the Australian Financial Complaints Authority (AFCA), a court or a tribunal which remains unpaid after reasonable steps as defined by a CSLR have been taken, before being able to access the CSLR.
• The CLSR should be industry funded: The CSLR should be funded by financial firms engaged in the types of financial services covered by a CSLR (initially specific types of financial advice).  The government should work with industry to develop an appropriate mechanism such as a levy to fund the CSLR.
• Legacy issues: The report states that there 'is a strong case for payment of legacy unpaid EDR determinations' but notes that there are a number of challenges associated with doing so, chief among which is funding.  The report comments: 'The key challenge to addressing these legacy unpaid EDR determinations is the appropriate source of funding'.  The report adds that …'it may not be either appropriate or desirable that current industry participants be required to contribute to compensation arising from determinations against former industry participants'.  On this basis the report states that government should identify a funding source to address legacy unpaid determinations.

Further detail: report recommendations

The report makes four recommendations addressing the design, scope and structure of a CSLR. The key points of each are below.

1. The establishment of a 'limited and carefully targeted' CSLR aimed at targeting the areas of the financial sector with the greatest evidence of need: financial advice failures provided by a relevant provider (as defined in s910A of the Corporations Act).
2. Initially the CSLR should be restricted to financial advice failure but should be designed with a view to expanding to other types of financial and credit services in future.
3. CSLR design:

• The CLSR should initially be restricted to financial advice failures where a financial adviser (from a relevant provider) has provided personal and/or general advice on 'relevant financial products' to a consumer or small business ie only advice given by a 'relevant provider', as defined in section 910A of the Corporations Act, would be covered by a CSLR.
• Operate prospectively: A CSLR should only apply to unpaid EDR determinations, court judgments and tribunal awards with are made after a CSLR is established ie only unpaid decisions which arise after a CSLR is established should be eligible for compensation.
• Eligibility to lodge a claim should be restricted to consumers and small businesses as defined by the Australian Financial Complaints Authority (AFCA).
• A CSLR should not independently reassess the merits of claims which it receives.  Before paying a claim a CSLR must be satisfied that the EDR determination, court judgment or tribunal award will not be paid by the financial firm to the consumer or small business.The report states: …'a CSLR should act as the final safety net to ensure consumers and small businesses are able to receive compensation after allother avenues have been exhausted'.
• Consumers and small businesses must have a decision from AFCA, a court or a tribunal which remains unpaid after reasonable steps as defined by a CSLR have been taken, before being able to access the CSLR.
• Compensation should be capped: A cap should apply to the level of compensation that a CSLR is able to provide.  The compensation cap should be subject to periodic review, to ensure it remains fit for purpose and that a CSLR remains financially sustainable.  A CSLR should set limits on the level and types of legal costs that are recoverable.
• The CLSR should be industry funded: The CSLR should be funded by financial firms engaged in the types of financial services covered by a CSLR (initially specific types of financial advice).  The government should work with industry to develop an appropriate mechanism such as a levy to fund the CSLR.
• Governance: ASIC should have oversight of a CSLR to ensure it is fulfilling its objectives similar to the role envisaged for ASIC in respect of AFCA.  The CSLR should be governed by an independent board with an independent chair and equal numbers of directors with industry and consumer backgrounds consistent with the model in the EDR framework.  Financial firms providing the types of financial services covered by a CSLR should be required to be members and contribute to the funding of a CSLR as a condition of licensing.

4. Existing regulatory requirements should be strengthened: Firms that rely on PI insurance to meet their licensing obligations should be required to provide additional data to ASIC to improve ASIC's ability to undertake market surveillance and targeted regulatory action.

Legacy issues: Providing access to redress for legacy issues will be 'complex and challenging'

Other challenges identified include:

• A need to quantify the issue: The report notes that the scope of the issue is presently unknown.  Given the lack of comprehensive data on the number of consumers and small businesses with past disputes in the categories identified by the Panel, or the level of compensation that may be payable, an initial information gathering phase would be required before proceeding with committing to a mechanism to provide access to redress for past disputes.
• Mechanisms for access to redress must have clearly defined time limits: Any mechanism for providing access to redress must clearly define time limits for past disputes that can be considered. The report adds that there are significant issues and potential regulatory costs that may apply if time limits are established that go beyond the existing statute of limitations. The outer limit for the age of disputes should be no more than 10 years.

Options for providing access to redress for past disputes: The report includes options, designed not as alternatives but which may operate together, to provide access to redress for past disputes. These include:

• Government led options including: government supported legal case funding; the establishment of a new body to examine past disputes and a government established compensation scheme for exceptional circumstances: and an industry led option.The report states that the panel considers that that the decision making function of any mechanism to provide access to redress for past disputes should be independent of AFCA.
• Industry led option:An industry led forum to hear past disputes.

Government to defer response to the report until after the conclusion of the Royal Commission: The Minister for Revenue and Financial Services, Kelly O'Dwyer stated that as the Royal Commission into the banking and financial services sectors will examine many of the issues that have been considered as part of the supplementary Ramsay Report, the government would defer its consideration of, and response to, the report until the royal commission has concluded.

'An incredibly costly shortcut which won't address the underlying issues'? The AFR writes that the Financial Services Council (FSC) commented in July that the costs of an industry funded compensation scheme (as recommended in the report) would be significant. Reportedly, Cadence Economics found the industry would need to contribute $100 million in levies a year to insure against future fallout from bad advice. If product failures were included, the figure would rise to $300 million a year. A scheme covering financial advice only would cost more than $100 million annually.

The article adds that the FSC reportedly described the CSLR as 'an incredibly costly shortcut which won't address the underlying issues.' The AFR adds that the Insurance council of Australia also commented that there was 'no justification' for such a scheme because it would involve 'cross-subsidisation of compensation costs by industry sectors, such as general insurance, unrelated to the consumer's financial loss'.